Hedge funds fleeing Bear's prime broker business

By Dane Hamilton

NEW YORK (Reuters) - Even the backing of the New York Federal Reserve and JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz) can't keep hedge funds from fleeing Bear Stearns' once-vaunted brokerage division.

Some hedge funds that have regularly traded with Bear over the years say they are shifting to other prime brokers, fearing they won't be able to get their cash and securities out of the bank if it were to be forced to file for bankruptcy.

"To the extent that we had balances at Bear, we moved them away in the last 10 days," said a senior executive at a $1 billion New York-based hedge fund, who like others asked to remain anonymous. "If they fail, we will have trouble getting out our cash and securities, and we are not alone in doing that."

Hedge funds use prime brokerage divisions to execute trades, borrow money and other services with larger funds using multiple brokers. Bear has long been among the top prime brokers, along with Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz). Lately, UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz), Citigroup (C.N: Quote, Profile, Research, Stock Buzz), Deutsche Bank (DBKGn.DE: Quote, Profile, Research, Stock Buzz) and others have been making big inroads into the lucrative market for serving growing legions of hedge funds.

But since rumors of liquidity problems at Bear Stearns BSC.N, began circulating in recent weeks, large hedge funds say they have been moving their business elsewhere. Several cited the example of Refco, the futures broker that abruptly went bankrupt in 2005, leaving thousands of clients scrambling for cash and securities held in margin accounts.

"There is no one in their right mind who is primed with Bear would keep their money there," said a portfolio manager at a $6 billion New York hedge fund. "The risk (of a Bear failure) is pretty low, but if something goes wrong all of a sudden you can't get your money out."

Bear is facing major problems in other parts of this business during its credit crisis.

Financial market traders across London have been told by their firms to stop dealing with Bear Stearns. At least six major institutions in London -- including Commerzbank (CBKG.DE: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) and JPMorgan (JPM.N: Quote, Profile, Research, Stock Buzz) -- had stopped giving prices to the U.S. bank, a credit trader at one European institution in London, who declined to be identified, told Reuters.