Hedge Funds May Boost Wall Street Profits in 2Q

NEW YORK ( TheStreet)-- Goldman Sachs ( GS), JPMorgan Chase ( JPM) and other big trading institutions just got a bullish sign for the second quarter from State Street Corp. ( STT), which saw an uptick in the business unit that lends out securities to hedge funds.

State Street's first-quarter earnings report, released Tuesday, revealed that the company's custodial business -- one of the world's largest -- had assets of $16.912 trillion at the end of the first quarter. That is 1.3% higher than in the first quarter of 2011 and 6.6% higher than in the fourth quarter.
An uptick in securities lending at State Street Corp. suggests hedge fund trading activity may on the rise.

"The only reason that securities lending would pick up is if hedge funds are increasing their borrowings," says Brad Hintz, analyst at Bernstein Research, who covers State Street as well as Goldman and Morgan Stanley. Hintz says hedge funds have been cautious of late, though securities dealers have said their prime brokerage units, which provide services to hedge funds, have performed better lately.

Asked on the conference call whether he expected securities lending to remain strong in the second quarter, as it has traditionally done, State Street Chairman, CEO and President Joseph Hooley responded in the affirmative.

"We don't see anything that causes us to believe that we won't see that cyclical second quarter, positive cyclical second quarter," Hooley said.

Securities industry watchers will get further color when Bank of New York Mellon ( BK), another giant securities lender, reports its first-quarter results Wednesday morning before the market opens.

While first-quarter trading revenues at Goldman, JPMorgan and other banks have proven better than the typically weak fourth quarter, they are down versus last year's fourth quarter for most big securities dealers.

-- Written by Dan Freed in New York.

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