Hedge Funds Move Away From Bear

Since the rescue of the company last Friday, many upscale hedge funds have begun moving away from Bear Stearns, which has caused even more damage to the crippled, former market leading, prime brokerage company.

Procedure for these sorts of companies, is to offer, among other services, trading and lending to hedge funds who pay them a great deal for this. Up until very recently, Bear was considered one of the top three companies of this sort, along wtih Goldman Sachs and Morgan Stanley.

According to industry sources, hedge funds such as Davidson Kempner Partners and Fir Tree Partners, have begun making efforts to disassociate themselves from Bear, pulling their funds as so many others have since the onset of the credit crisis.

Both Davidson Kempner Partners and Fir Tree Partners have declined to comment, and a spokesperson for Bear stated they would not comment on specific clients.

A manager from a hedge fund who didn’t have ties with Bear has stated that the hedge funds that are still connected to the company should have foreseen this turmoil, and that regardless of their current efforts to move away from Bear, it is far too late. He also said it showed a lack of preparedness on the behalf of their risk-management systems.

Until last week when clients pulled $17 billion from Bear, their prime brokerage and mortgage business would have been very enticing for prospective buyers, however with that now gone it would mean that buyers were looking for Bear’s infrastructure and staff.

The downward trend for Bear’s prime brokerage actually began roughly three years ago. However it has been accelerated extremely by issues within the mortgage industry, and two hedge funds run by Bear’s asset management division, collapsing.

The trend in the market, lately, has been for hedge funds to not invest wholly with one broker, so as to circumvent extreme losses should anything happen to that bank.

Founder of S3 Partners, which is a U.S. advisory company for hedge funds, Robert Sloan - a former head of prime brokerage for Credit Suisse - has stated that the plight that Bear now faces could actually help to establish a new era in financing for hedge funds.

Sloan went on to say that even though prime brokerage had been a staple of the market for some time, it had recently become a cornerstone in business for Wall Street and that the position that Bear finds itself in should encourage hedge funds to acknowledge and prepare for this kind of event.

Some from within the hedge fund industry, have begun to ask whether it was still a wise decision to enable hedge funds to depend on financing from unstable sources, and if it was possible for hedge funds to continue on in the same manner as they have been.

These same sources have stated that perhaps an entirely new method of financing needs to be implemented, such as large pools of money to provide the liquid assets, such as endowments and pension funds. Either way, a fundamentally different style of financing to prime brokerage will be looked into by hedge funds.

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