Hedge Funds Pulled Back From Lehman Prime Bkg Before Bankruptcy

CNNMoney.com – Hedge funds were leaving the prime brokerage business of Lehman Bros. (LEH) long before Lehman filed for Chapter 11 bankruptcy Sunday, and now, business there has all but stopped, according to sources.

But in certain areas, like the statistical arbitrage and repurchase, or repo markets, Lehman was and still is a top player. What happens to the prime brokerage is a complicated question, because most of that business is located in the U.K. While Lehman included its prime brokerage as part of its bankruptcy, it is not thought to be subject to the laws of Chapter 11 since the business is in the U.K.

Lehman’s prime brokerage, which like others lends money and securities to hedge funds as well as provides administrative services from back-office help to processing trades, was a key revenue-earner for the bank as recently as earlier this year. In its first-quarter earnings report in March, Lehman had reported a 38% year-over-year revenue increase in its securities service unit, which includes prime brokerage. At that time, it said it had $194 billion in hedge fund balances.

But as the investment bank started stumbling more and more the past few months – along with the rest of the financial services industry – Lehman started losing all or part of the business of hedge fund customers afraid of the counterparty risk attached with dealing with Lehman.

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