Hedge funds have been widely criticised throughout the recent Wall Street meltdown for being quick to panic and withdraw assets from investment banks that show signs of weakness. The withdrawals have been described as runs on the bank, although they bear only a passing resemblance to bank customers taking their deposits out of a bank.
So why have hedge funds been so quick to pull away? A story in the New York Times this morning nicely illustrates why the hedge funds react so swiftly to bad news about their prime broker. It seems that many funds had assets with Lehman Brothers, and now that the firm is in bankruptcy they no longer have access to these assets. The lesson is all too clear: funds the pulled their accounts early prospered, while those that stayed loyal to Lehman are suffering.