Morgan Stanley Hedge Funds, Prime Brokerage Post Declines

Dec 18 2008 | 2:56am ET

Morgan Stanley posted a whopping $2.36 billion loss in the fourth quarter, driven in part by poor performances and drawdowns in its asset management business.

The firm’s asset management business, posted a $1.81 billion pre-tax loss for the fiscal year. Net revenue at the core business—which includes hedge funds and funds of hedge funds—fell 49% to $1.6 billion. The firm said the decline was primarily due to $470 million in losses on structured investment vehicles in its portfolios.

Morgan Stanley’s prime brokerage, which was hit hard by investor skittishness following the Lehman Brothers bankruptcy, has recovered somewhat, according to CFO Colm Kelleher. Morgan Stanley’s prime brokerage assets were 37% lower on average in the fourth quarter than in the third, although it lost 65% of its assets during the quarter.

“What we're seeing is hedge funds wanting to move balances back now,'” he said. “We feel pretty encouraged about it. What we're not too encouraged about is the overall state of the hedge fund industry.”

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