Hedge Fund Hell: Banks Jockey For Position

"They'll tell you what the revenues are, but not the amount of underlying assets they're derived from. Or they'll tell you assets under management are up or down, but they won't say by how much," Harte says.

Harte notes Goldman's prime brokerage revenues were 19% higher in the fourth quarter, despite what he expects is a substantial drop in total assets under management, given widespread losses and client withdrawals in the hedge fund industry. He attributes the gain to higher prices and increased market share following the failure of Lehman Brothers and the sale of Bear Stearns.

Both Harte and Sloan see a tremendous opportunity for Bank of America (BAC) following its acquisition of Merrill Lynch (MER). Though BofA sold its prime brokerage business to BNP Paribas earlier this year, Harte believes Merrill's sizeable presence in the space will convince BofA to take another stab at success.

"I don't think anyone would not want to be a leading player in prime brokerage," Harte says. "The problem is it has high barriers to entry. By acquiring Merrill, BofA gets to knock down a lot of those barriers."

Sloan notes that Merrill's unrivalled access to retail investors, through its "thundering herd" of financial advisors, gives it a large inventory of securities it can lend out to hedge funds looking to short the market. (Securities lending is a major prime brokerage service.)

"Merrill should dominate the prime brokerage business," he says.

A Merrill spokeswoman declined to comment and BofA spokespeople did not return calls.

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