(Bloomberg) — Hedge funds will pay Wall Street record fees this year for brokerage services, a business dominated by Morgan Stanley, Bear Stearns Cos. and Goldman Sachs Group Inc.
The securities industry’s annual revenue from lending shares and cash, clearing and settling trades, and providing risk-analysis software to hedge fund managers will rise to $7.5 billion, up 32 percent from 2003, Sanford C. Bernstein & Co. analyst Brad Hintz estimates. So-called prime brokerage has become the fastest-growing source of income from trading clients as institutions ranging from the University of Texas to the Virginia Retirement System increasingly diversify their investing with hedge funds.
Morgan Stanley, the No. 3 securities firm by market value, Goldman, the second biggest, and Bear Stearns, the fifth largest, have a hammerlock on hedge fund services after spending more than $200 million a year on trading systems, offering more stock for short sales and courting former employees who left to start their own hedge funds. Only providing mergers and acquisitions advice generates higher profit margins for securities firms, said Robert Sloan, 42, who ran Credit Suisse First Boston’s prime brokerage unit for six years until 2002.
“One of the costs of making money is the fees that are charged by prime brokers,” said Steven Persky, co-founder and managing partner of Dalton Investments LLC, a Los Angeles-based hedge fund with $1.1 billion in assets. “There’s not a ton of transparency in pricing and they don’t go out of their way to highlight how much money they’re making.”
