There's been a lot of bad news for hedge funds as of late. More continue to shut down. Lawmakers seem bent on more regulation. And investors are getting even more antsy. The threat of redemptions hangs over all. Which brings us to the prime brokers, who are as nervous as ever these days. The Financial Times reports they are increasingly scaling back on providing leverage. The issue is why: Some have suggested that the decision by Morgan Stanley and Goldman Sachs--the two biggest prime brokers--to convert to commercial banks essentially forced them to drastically scale back their prime brokerage businesses. Commercial banks can't lend like that. And that has forced hedge funds to contract.

For more:
- here's the FT article
- here's a Portfolio item on Goldman and Morgan

Related Articles:
Morgan Stanley, Goldman Sachs now commercial banks
Navigating the Hedge Fund Maze - September 2008