EQUITY & HEDGE FUNDS MAY TAKE WALL ST.'S PLACE

With just two large investment banks remaining - Morgan Stanley and Goldman Sachs - questions are growing over who might step into the suddenly emptier playing field.

Many Wall Street watchers are pointing to the looming presence of large hedge funds and private-equity firms, which have been stealthily encroaching on many of Wall Street's traditional lines of business for years now.

"I think the new Wall Street is not going to be on Wall Street," said Ferenc Sanderson, a hedge fund researcher at Thomson Reuters. "The headquarters of Citadel is in Chicago," he said.

Indeed, the $20 billion Citadel Investment Group is more often compared to Goldman these days.

Last year, Citadel branched into providing administrative and technical support to other hedge funds, not unlike the investment banks. Citadel also has a unit that executes trades for retail brokerages, akin to market makers like Morgan Stanley and Merrill Lynch.

It's a far cry from the small operation Ken Griffin had when he founded Citadel with a modest $1 million in trading money in 1990.

Meanwhile, Steve Schwarzman's buyout firm Blackstone has been encroaching on traditional investment banking roles with its growing advisory business.

Blackstone also raised eyebrows by dispensing advice to blue-chip company Proctor & Gamble when it was looking to spin off units, and to Microsoft when it sought to buy Internet company Yahoo!.

But the new Wall Street players aren't necessarily any safer than their predecessors, people warn.

Firms like Blackstone, Fortress, Och- Ziff and KKR are or soon will be public companies that are tough to value and therefore vulnerable to the same crisis of confidence problems that befell Bear and Lehman - and nearly crippled Merrill Lynch, people say.

"It is all a matter of how much leverage they take on," said Scott Rothbort, finance professor at Seton Hall University's Stillman School of Business and president of LakeView Asset Management.

There're also growing concerns these new players are setting themselves up for the same mistakes by taking their stocks public, making them vulnerable to shareholders and encouraging them to take risks to boost the stock price.