Fearing financial trouble hedge funds flee Morgan Stanley

London, Sep 26 (PTI) Worried that global financial
services provider Morgan Stanley may land into financial
troubles like Lehman Brothers, several hedge funds fled the
bank resulting in a loss of billions of dollars in its prime
brokerage business last week, a media report says.

"Many of the world's biggest hedge funds moved their
assets to commercial banks regarded as safer last week, as
they and their investors worried that Morgan Stanley could
follow Lehman into trouble," the Financial Times said.

Quoting people familiar with the business Financial Times
said, "Losses will deal a big blow to Morgan Stanley as its
prime brokerage is one of its most profitable and successful
businesses."

The withdrawal of client assets is likely to make Morgan
Stanley's business less profitable by restricting its ability
to fund loans to hedge funds from balances left by other hedge
funds, F.T. added.

Hedge funds are pooled investment funds, usually a
private partnership, that seeks to maximise absolute returns
using a broad range of strategies, including unconventional
and illiquid investments.

The prime brokerage business reported record quarterly
profits this week and it seems to have stabilised after the
proposed U.S. government bailout led to soaring markets.

F.T. said Morgan Stanley declined to comment on the
flight of cash and stock out of the division that occurred as
the credit default swap market ballooned.

Several of Morgan Stanley's hedge fund clients are likely
to return to the bank once markets stabilise, the daily said
and added that the prime brokerage, which provides hedge funds
with custody and loans and assists short selling, is highly
rated by many managers.

Morgan Stanley's London prime brokerage business lost
close to half of its assets, as hedge funds were worried about
fellow funds caught up in the collapse of Lehman that found
they could not access assets in its European arm.

Despite efforts by Morgan Stanley's executives to
persuade rivals not to approach customers, banks such as
JPMorgan, Credit Suisse, Citigroup, Deutsche Bank, Barclays
Capital and U.B.S. attracted many of their clients, report
added.

The bankruptcy filing for Lehmans brokerage subsidiary
was delayed for several days allowing many funds to move
elsewhere, but the London business was put straight into
administration, trapping an estimated 40 billion dollars of
hedge fund assets.

Towards the end of the week several rivals said they had
dropped internal restrictions on approaching Morgan Stanley
clients.