The Wall Street Journal tells us that some less-than-nimble-footed hedge funds wound up not moving their prime brokerage accounts quickly enough out of Lehman to avoid having those assets frozen in the bankruptcy.
Most readers will probably find it hard to work up much sympathy for these Masters of the Universe. Despite the name “prime broker”, only small hedge funds have only one prime broker, Medium to bigger hedgies have two or three, some even more. So even firms caught are not completely stuck, although not being able to trade out of a position is not where anyone ever wants to be.
But these guys are supposed to be the savviest investors, right? The Bear Stearns meltdown made clear that a run on a securiites firm can push it over the edge in a mere two weeks. Lehman’s stock broke through $20 a month after a share offering at $28. That should have been a red flag to anyone with an ounce of self preservation to move their business elsewhere.
From the Wall Street Journal:
The collapse of Lehman Brothers Holdings Inc. is creating a quandary for hedge funds: Who to do business with in a tumultuous prime-brokerage industry.
Late last week, many hedge funds scrambled to shift that business away from Lehman and to other so-called prime brokers, which provide trading and lending services to the funds. But some were caught up in the bank’s move to file for bankruptcy protection on Monday, say lawyers and other industry specialists. As a result, they have found their holdings effectively frozen, with no indication of when they might be able to access them.
Legal experts cautioned that it could be weeks or months before the mess is sorted out, leaving hedge funds unable to unwind positions at a time when many assets are falling sharply in value…
The rush to get away from Lehman has involved some of the world’s biggest hedge funds, including London-based hedge fund GLG Partners LP, in which Lehman owns a stake. In a statement Tuesday, GLG said it had in recent months shifted assets away from Lehman. “The majority of these transfers have already settled, and we expect the remainder to settle shortly,” the statement said. “We believe the residual exposure of the GLG Funds to Lehman will not be material.”