June 29 (Bloomberg) -- Goldman Sachs Group Inc.'s share of the Asia-Pacific prime brokerage market has dropped by 43 percent in the past four years as Morgan Stanley and UBS AG increased their share of hedge fund assets, a survey showed.

Morgan Stanley overtook Goldman to be the region's No. 1 provider of brokerage services to hedge funds, with about 28 percent of the market by client assets, up from 27 percent, AsiaHedge magazine's survey showed. Goldman's share dropped to 25 percent from 44 percent when the last poll was published in March 2003. UBS more than quadrupled its share to 7.2 percent, taking the No. 3 spot.

The changing market share reflects increased competition as money managed by hedge funds in the Asia-Pacific region balloons. AsiaHedge estimates the pool of funds has grown almost eightfold in the past four years to $162.1 billion.

``There's almost over-competition among the new prime brokers,'' said Peter Douglas, a Singapore-based principal of hedge fund research firm GFIA Pte. ``One of the possible risks that we see is that there is over-capacity on the prime brokerage side and that prime brokers begin to pitch for market share rather than profitability.''

Prime brokerages offer hedge funds services such as clearing, custody, securities lending, financing for assets and introducing fund managers to potential investors.

The latest AsiaHedge survey covered more than 750 hedge funds that are managed primarily in the region, or funds with at least 80 percent of their assets invested in the Asia-Pacific. The survey overlooks big hedge fund managers such as Citadel Investment Group LLC, Gandhara Advisors Europe LLP and TPG-Axon Capital Management LP unless they have funds dedicated to Asia.

Goldman Dominance

Goldman and Morgan Stanley four years ago controlled 58 percent of the number of prime broker mandates awarded by hedge funds in the region and 71 percent of assets managed by those funds, according to the 2003 poll.

Newer arrivals sometimes collect a large number of small, less profitable clients who provide lower income because they trade less frequently, GFIA's Douglas said.

``We've seen, for example, some low-turnover, long-only managers being pitched by prime brokers,'' he said.

Prime brokers earn some of their revenue from lending securities to fund managers who then sell them, betting they can buy them back at a profit -- known as short selling. ``Long'' fund managers buy and hold stocks anticipating they will rise.

Goldman Focus

``Prime brokerage activities in Asia now cover a wide range of funds and products,'' said Fred Towfigh, head of Goldman's prime brokerage business in the region. ``Our focus continues to be on the leading established hedge funds and start-ups with the highest potential, a segment where we continue to show market leadership.''

Goldman generated $2.18 billion of net revenue last year from securities services, including prime brokerage, 22 percent more than the year before, the New York firm's annual report showed. Morgan Stanley's revenue from equity sales and trading climbed 32 percent to $6.3 billion in the year ended November, fueled by a third year of record results in prime brokerage.

In the past year, China, India, Australia and South Korea joined Japan and Hong Kong in having stock markets valued in excess of $1 trillion.

The firm's Asia-Pacific market share was hurt by Japan, where hedge fund growth has lagged the rest of the region. Japan's share of the market fell to 12.6 percent by assets this year from 22.3 percent in 2003.

Japan

Goldman's share of Japan hedge fund assets slipped to 57.8 percent from 83 percent in 2003, according to AsiaHedge.

The Japan prime brokerage market quadrupled in terms of assets during the past four years, according to AsiaHedge. Hedge fund assets in Australia grew 23-fold, and now account for 22.5 percent of the regional total, up from 7.6 percent.

In this year's survey, UBS leads in terms of the number of Australian accounts. The Swiss bank has collected 33, compared with Goldman's 21. Morgan Stanley, No. 3 in the country by mandates, has the largest share of assets at 12.4 percent.

Assets managed by hedge funds in Hong Kong, China and Singapore surged almost 15-fold and now account for 28 percent of the regional total.

Morgan Stanley has close to 31 percent of the assets in Hong Kong and China, more than double Goldman's share, the survey showed. Morgan Stanley also leads in serving hedge funds in the U.K. and Europe that invest most of their assets in the Asia Pacific area.

AsiaHedge assigns equal amounts of client assets to each joint prime broker appointed by a hedge fund, a practice that has made client assets an approximation of market share, it said in the survey.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

Last Updated: June 29, 2007 00:06 EDT