The sense of relief among the ranks at Morgan Stanley was palpable at the bank’s autumn cocktail party held amid the elegance of London’s Wallace Collection on Tuesday evening. John Mack lieutenant co-chairman Walid Chammah welcomed guests with an understandable message of relief: “What a difference a week makes!” Later Mr. Chammah told me that the prime brokerage business had “changed overnight” but that the bank’s continuing conscientious service to hedge funds had helped it retain the vast majority of its clients. As we’ve discussed in several recent stories, Mr. Chammah confirmed that there is an unprecedented battle for market share in the prime services space. From his perspective, Morgan Stanley and Goldman remain in the top slots with J.P. Morgan Chase (after acquiring Bear Stearns) in third, but with Credit Suisse, Citigroup and Deutsche Bank all gaining share with new client wins. Marty Byman, Morgan Stanley’s co-head of prime services, told me that a few days of things “returning to relatively normal” had steadied the nerves of many hedge fund manager clients. We paused to drink to that before he cautioned that a lot of deleveraging is still happening and that the impact of this on investor returns would continue to reverberate across the hedge fund industry.

At a time when hedge funds are in the public spotlight more than ever before, Nat Rothschild, heir to the illustrious banking family fortune and early partner in the $13 billion New York-based hedge fund Atticus Capital has gotten involved in a high profile spat with leading Conservative MP and Britain’s opposition finance spokesman George Osborne. In a letter published in The Times of London, Mr. Rothschild accuses Mr. Osborne of meeting Russian oligarch Oleg Deripaska to “solicit” a large campaign donation even though contributions from foreigners are illegal under British law. Amid a “welter of claim and counterclaim”, the business of activist investing goes on with Atticus succeeding earlier this week in its long term campaign to oust Deutsche Boerse chairman Kurt Viermetz.

Just as bankers from Morgan Stanley and other firms have confirmed the rising competition in prime services, so arrives a new entrant to the market in the shape of Conifer, a fund administrator and services provider to hedge funds with a 20-year track record. The firm is targeting smallish $50 million to $250 million funds looking to add a prime broker. With financial backing from J.P. Morgan, Conifer’s move will be of interest to a lot of entrepreneurial hedge funds that may be looking for a more customized service than many of the big prime brokers find it cost effective to provide.

Meanwhile, more data shows how tough the environment is for hedge funds.
The EurekaHedge Hedge Fund Index racked up its worst month ever in September, dropping 4.7%. On a regional basis, North America and Japan outperformed while Europe and Emerging Markets underperformed with losses of nearly 7%. It makes me curious to see what the indexes will show for October.

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