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Hedge funds pass mutual funds in US equity trading volume, says Greenwich survey

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Hedge funds surpassed mutual funds as a source of US equity trading volume last year and now rank second only to traditional asset management shops

Hedge funds surpassed mutual funds as a source of US equity trading volume last year and now rank second only to traditional asset management shops, according to Greenwich Associates’ 2008 US Equity Investors study.

US institutions stepped up the pace of their domestic equity trading activity last year, with the volume of commission paid by the typical institution increasing from USD24.7m in 2006-07 to just over USD26m in 2007-08. Driving much of this growth were hedge funds, which generated nearly 30 per cent of US institutional equity commission payments in the year ending February 2008, up from 24 per cent in the previous 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 US equity trading perspective, hedge funds were extremely active,” says Greenwich Associates consultant John Feng.

“When you include the business from new hedge funds added to our research universe from 2007 to 2008, hedge fund commission payments on US equity trades increased by more than 45 per cent.”

Using the same metrics, equity commission payments by traditional investment managers increased by nearly 30 per cent year-on-year and now account for some 47 per cent of the market-wide total.

However, mutual fund commission payments declined for at least the third consecutive year, dropping by roughly 19 per cent from 2007 to 2008 after slipping almost 10 per cent the previous year.

Greenwich Associates notes that US equity brokerage commission totals are getting a boost from a levelling off of the decades-long decline in trading rates. Blended ‘all-in’ commission rates on trades of US stocks were unchanged from 2007 to 2008.

The increasing influence of hedge funds as a generator of US equity trading business has helped Merrill Lynch and several other firms solidify their positions as leading US brokers in terms of market share in institutional trading.

According to Greenwich Associates, Merrill Lynch and Lehman Brothers have built the biggest trading franchises across the US equity market as a whole, with market shares of between 8 and 9 per cent.

Goldman Sachs, Credit Suisse, Morgan Stanley, and Citi are close behind in the 7-8 per cent range, and UBS leads the next tier at with more than 6 per cent. The report says it will be interesting to see how, and to which brokers, the market share of approximately 6 per cent held by Bear Stearns will be redistributed.

In terms of US equity research and advisory, four brokers – Merrill Lynch, Citi, Goldman and Morgan Stanley – have a commission-weighted market share of close to 9 per cent or higher. Bernstein ranks fifth with just over 7 per cent.

US institutions give the highest ratings for overall sales trading and trading quality to Merrill Lynch and Lehman Brothers, with a second tier headed by Credit Suisse and Morgan Stanley. On the research and advisory side, Lehman Brothers, Citi, Merrill Lynch and Bernstein score highest in the Greenwich Quality Index for sales coverage.

However, the competitive landscape changes significantly when the analysis is restricted to the biggest and most actively trading US institutions, a group in which hedge funds are prominent. Among this market segment, Merrill Lynch and Morgan Stanley are jointly rated highest in terms of quality for trading.

“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,” says Greenwich Associates consultant Jay Bennett.

Greenwich Associates is an international research-based consulting firm in institutional financial services, specialising in providing benchmark information on best practices and market intelligence on overall trends. Based in Stamford, Connecticut, with offices in London, Toronto, Tokyo and Singapore, the firm offers more than 100 research-based consulting programmes to more than 250 global financial

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