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Hedge Funds Pass Mutual Funds As Source Of U.S. Equity Trading Volume
( Greenwich Associates )
(July 17, 2008)

Hedge Fund Boom Boosts Brokerage Business For Merrill Lynch, Morgan Stanley, Others

Thursday, July 17, 2008 Stamford, CT USA - Hedge funds surpassed mutual funds as a source of U.S. equity trading volume last year and now rank second only to traditional asset management shops in those terms, according to the results of Greenwich Associates' 2008 U.S. Equity Investors study.

U.S. institutions stepped up the pace of their domestic equity trading activity last year. The amount of commissions paid by the typical U.S. institution increased to just more than $26 million in 2007-2008 from roughly $24.7 million in 2006-2007. Driving much of this commission growth were hedge funds, which generated nearly 30% of U.S. institutional equity commission payments in the year ending February 2008, up from 24% in the prior year.

"Although the second half of 2007 was something of a wild ride, hedge fund performance for the year was relatively strong, and from a U.S. equity trading perspective, hedge funds were extremely active," says Greenwich Associates consultant John Feng. "When you include the business from the new hedge funds added to our research universe from 2007 to 2008, hedge fund commission payments on U.S. equity trades increased more than 45%."

Using the same metrics, equity commission payments by traditional investment managers increased by nearly 30% year over year and now account for some 47% of the market-wide total. Meanwhile, mutual fund commission payments declined for at least the third consecutive year, dropping by roughly 19% from 2007 to 2008 after slipping almost 10% the prior year.

(Note: U.S. equity brokerage commission totals are getting a boost from a leveling off of the decades-long decline in trading rates. Blended "all-in" commission rates on trades of U.S. stocks were unchanged from 2007 to 2008. A complete analysis of trends in institutional equity brokerage commission rates can be found in the 2008 Greenwich Report.)

Hedge Fund Boom Boosts Brokerage Business
The increasing influence of hedge funds as a generator of U.S. equity trading business has helped Merrill Lynch and several other firms solidify their positions as leading U.S. brokers in terms of market share in institutional trading.

The results of Greenwich Associates' 2008 research reveal that across the entire U.S. equity market, Merrill Lynch and Lehman Brothers have built the biggest trading franchises, with market shares between 8-9%. Goldman Sachs, Credit Suisse, Morgan Stanley, and Citi are close behind in the 7-8% range, and UBS leads the next tier at mid-6% share. It will be interesting to see how, or to which brokers Bear Stearns approximately 6% market share will be re-distributed.

In terms of U.S. equity research/advisory, a total of four brokers - Merrill Lynch, Citi, Goldman Sachs, and Morgan Stanley - have achieved a commission-weighted research/advisory share of close to 9% or higher. Bernstein ranks 5th with just over 7% share.

U.S. institutions give the highest ratings for overall sales trading & trading quality to Merrill Lynch and Lehman Brothers. A next tier is led by Credit Suisse and Morgan Stanley. Turning to the research/advisory side, looking at a firm's score on the Greenwich Quality Index for Sales Coverage provides a quick and accurate snapshot of how institutions perceive the overall quality of each broker's equity sales and research franchise. Scoring at the top of the GQI in this category are Lehman Brothers, Citi, Merrill Lynch, and Bernstein.

However, the competitive landscape changes significantly when the analysis is restricted to only the biggest and most actively trading U.S. institutions - a group in which hedge funds play a prominent role. Among this critical market segment, Merrill Lynch and Morgan Stanley jointly rate at the top of the Greenwich Associates rankings in terms of quality ratings for trading awarded by institutions in this group. "Comparing results from the broad market with those from these 'priority' institutions, Credit Suisse and Goldman Sachs also appear to be doing a very good job among the bigger and more active institutions in the U.S. equity market," says Greenwich Associates consultant Jay Bennett.

For more information contact:
Jeanine Canneto
+1 (203) 625 4342
jcanneto@greenwich.com

Greenwich Associates is the leading international research-based consulting firm in institutional financial services. Greenwich's studies provide benefits to the buyers and sellers of financial services in the form of benchmark information on best practices and market intelligence on overall trends. Based in Stamford, Connecticut, with additional offices in London, Toronto, Tokyo, and Singapore, the firm offers over 100 research-based consulting programs to more than 250 global financial-services companies. Please contact us for further information or to arrange an interview with one of our consultants. You can visit our website, www.greenwich.com, for more information.

 

 

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