Banks Face 50% Drop In Hedge Fund Fees.
This news is retrieve from Dow Jones & Company, Date: 10/11/2008
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A piece of advice don't Hold any Bank shares! Sell it!
This recession is cause by Banking sector, They loss huge money.
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The decline in the hedge fund industry will wipe out tens of billions of dollars in fees they pay to investment banks next year, forcing banks to make further staff cuts and shift their focus to less lucrative customers.
The closure of hedge funds, withdrawals by investors and deleveraging in the hedge fund industry, which has gathered pace over the past six weeks, has started to have an impact on sales and trading and prime brokerage revenues, the two major areas where hedge funds pay fees and commissions to banks. Huw van Steenis, head of banks and financials research in Europe at Morgan Stanley, forecasts a 45% to 55% drop in investment banking revenues from hedge fund business in 2009 - significantly worse than the widely forecast figure of 30% of hedge funds closing. "This would be such a sharp fall that it would call for a major right sizing of the business," he said. Hedge funds were among the most important customers of investment banks, paying an estimated $61 billion in fees to banks, or 21% of total revenues at the peak, according to estimates from Credit Suisse published last year.
In the boom years, when hedge funds grew their assets to almost $2 trillion, banks weak in prime brokerage, the business of financing hedge fund trades and custody of their assets, added to their divisions with several transactions in the sector. BNP Paribas bought Bank of America''s prime brokerage business, JP Morgan inherited Bear Stearns'' and Barclays Capital took over Lehman Brothers''. But forecasts of future revenues from hedge funds is expected to reverse into a rapid decline, across both prime brokerage and sales and trading.
Morgan Stanley estimates suggest hedge fund assets will shrink from $1.9 trillion in June to $1.3 trillion to $1.4 trillion in December and could fall as low as $1 trillion in 2009. Robert Sloan, managing partner of financing specialist S3 Partners in New York said: "Contract values, interest rates and the value of assets are down, the number of funds has fallen and liquidity is less; when you''re running a prime brokerage business that''s bad for making money." He added that prime brokers would have to be doing a lot more volume or widening spreads just to stand still. As a result, analysts are forecasting further staff cuts. Van Steenis said: "While UBS, we estimate, will start 2009 with staff only 4% above 2003, most other banks remain far heavier. We think 2009 could be another very painful year of adjustment, like 2002 was."
The deleveraging process has already started to dent some prime brokerage businesses. UBS, which grew its prime brokerage business aggressively over the past five years, said last week that revenues slowed in thethird quarter, partly as a result of lower client balances. Furthermore, analysts said even those universal banks that added large numbers of prime brokerage accounts in September following the collapse of Lehman Brothers are now unlikely to enjoy the full benefits from the business as gains are offset by lower leverage levels. Richard Webley, a director in the capital markets practice of business and technology consultants Detica in New York said: "The recent years of sustained growth and expansion in prime brokerage will see a fundamental shift in 2009."
A chief executive of a London-based hedge fund said: "With the lower amounts of leverage being employed by hedge funds, it''s not hard to see prime broker revenue next year will be half of what it may have been at its peak at the end of last year. The outlook for 2009 is pretty bleak." Roy Martins, head of international prime services at Credit Suisse, which took in Sfr117 billion inclient assets in the third quarter, said: "The concern is that the markets have fallen so much and spreads are based on notional values.
That''s a bigger concern than deleveraging, which has only effected certain funds." But a more damaging, although less visible, impact on investment banking revenues is expected to come through reduced sales and trading commissions from hedge funds as their assets shrink and they turn over their portfolios less. To compensate for the decline in revenues from hedge funds, investment banks are steering their sales forces towards long-only fund managers which, before the rise of hedge funds this decade, were their bread and butter. But they trade less and in lower margin, more vanilla products. David Martins Da Silva, head of hedge fund sales for rates at BNP Paribas said: "It is very easy for people to write off hedge funds, but the reality is that although they have gone from being easily the most heraldedaccounts, they remain an important sophisticated investor type with a unique mandate."
