WEST PALM BEACH, FL (HEDGECO.NET) – A new survey conducted by Greenwich Associates, a US-based research firm shows that many banks have extended their credit lines to hedge fund companies, during thepast six months. According to the study, over one third of those surveyed reported that they have increased their level of lending to hedge funds during the past 12 months. The same study also saidabout 20% of the hedge funds acknowledged that their banking institutions have decreased their margin requirements during the past 12 months.

Hedge fund assets continue to increase significantly from one year to another. Currently hedge funds manage about US $1 trillion, an increase of about US $50 billion from the levels recorded during the second quarter of 2003. According to Tim Sangston, such rapid growth of assets has raised some concerns about the prime-brokerage business between banks and hedge fund firms. According to Sangston, �When banks and dealers are having so much success with hedge funds, they can tend to overlook things,� he said.

According to published reports, a London-based prime broker said many prime brokerage operators are taking in added risk, providing loans to start-up hedge fund managers. The unnamed prime broker said they are worried that �unqualified hedge fund managers are finding prime brokers to sponsor them, finance them and find them investors, all because they want to get new clients on board. But they are not applying quality control because all they want is new business. That is their only concern.� The spokesman also said, �Prime brokers need to get revenues in on the back of that. In the battle to bring in new clients there is a danger that you will take on clients that don’t have the right credentials and will put them in business, jeopardizing assets.�

Since the collapse of LTCM, banks have became more strict in loaning money to hedge funds, and leverage levels applied by hedge fund managers have dropped since then. It is unclear if these new concerns are widespread within the international brokerage firms. It is however unlikely that the hedge fund industry will see another huge failure as big as the Long Term Capital Management.

Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net

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