For the hundreds of hedge funds caught up in the collapse of Lehman Brothers International’s prime brokerage, it might take years to claw back securities entrusted as collateral. Some face destruction through rehypothecation. It’s the first case of its type, and now the entire structure of prime brokerage is under scrutiny.
By the time of the credit crisis, John James had been running his hedge fund company, Oak Group, for more than 20 years. He set up the long/short equity funds when he turned 40 and had built up a small and loyal client base, in addition to investing all his own money. Since inception, the fund had returned on average about 10% every year, and although this year returns were flatter because of the state of the economy, business has been good. Sadly for James, though, he used just one prime broker to hold his cash and securities, and that broker was Lehman Brothers International.
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