Institutional Investor's Alpha Magazine - December 2008 / January 2009 - (Page 5)

LONGS Not So Prime Now E nvied by rivals for its share of the hedge fund prime brokerage market, Morgan Stanley was an early and successful entrant in the business. Alongside Goldman, Sachs & Co. and now-defunct Bear Stearns Cos., it dominated for 20 years or more. But Morgan’s stature dropped not long after Lehman Brothers Holdings ﬁ led for bankruptcy on September 15 (the same day Merrill Lynch, in a preemptive move, sold out to Bank of America Corp.). Spooked by the crumbling markets, clients began to reduce their holdings at Morgan — whose stock price by mid-December was down 75 percent from its 52-week high — and some even pulled out entirely. The ﬁ rm lost more than 30 percent of its balance sheet over the course of a few weeks this past fall. Banner clients that cut assets or made for the exits included New York– based, $13.6 billion Millennium Partners. John Mack, Morgan’s hard-nosed CEO, reminded people of why his nickname is Mack the Knife when he issued a memo on September 17 in which he took short-sellers to task for the bank’s troubles. His was one of the loudest voices on Wall Street calling for a rule against short-selling on certain securities (including his ﬁrm’s stock). This irked many a hedge fund manager: They were Morgan customers, after all — cash cows for the bank — and Mack was threatening the lifeblood of their industry. “You had the most proﬁcient prime brokerage platform in the marketplace being compromised by its leader,” explains Keith McCullough, a former portfolio manager at Evanston, Illinois– based, $9 billion Magnetar Capital and now CEO and CIO of Research Edge, Illustration by Joshua Gorchov & SHORTS an independent investment boutique in New Haven, Connecticut. “He tried to ban short-selling!” In the ensuing weeks, Mack made clear that his ﬁrm was dialing back its prime brokerage and — like many big brokerages — began culling smaller clients especially, a further affront to hedge funds. James Zurlo, head of prime brokerage sales at broker-dealer Gar Wood Securities in New York, estimates that a fund must now manage $150 million to get in the door of a major prime brokerage. Morgan may have done more than other investment banks to alienate hedge fund managers, but the prime brokerage business has slowed everywhere. As hedge fund wealth has evaporated in the current downturn, a lot of the traditional warmth between brokers and funds has cooled. Things change, of course, and springtime may bring a thaw. — Imogen Rose-Smith Critics say Morgan Stanley CEO John Mack created some of the very winds that are battering the bank now. Flameout in the U.K. T he sudden demise of New Star Asset Management Group may serve as a warning to struggling hedge fund ﬁ rms — like Och-Ziff DECEMBER 2008/JANUARY 2009 • INSTITUTIONAL INVESTOR’S ALPHA • 5

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2008

Institutional Investor's Alpha Magazine - December 2008 Contents Letter from the Editor Longs & Shorts Inside the Trade Pension Corner The Good Guys Interview: Stanley Fink Cover Story: The New Regulatory Reality United States: The Usual Suspects Europe: Flirting with Unity Asia-Pacific: What Asian Contagion? In Theory In Focus Strategies Research Center Alpha Bytes Unhedged Commentary

Institutional Investor's Alpha Magazine - December 2008

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