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By Svea Herbst-Bayliss

BOSTON, May 2 (Reuters) - Hedge funds will likely hire additional prime brokers -- their lifeline to financial markets -- as more assets pour into the $1.2 trillion industry, according to a study released on Tuesday.

Prime brokers have long cleared trades, raised money and even found investors for the world's roughly 8,000 hedge funds, and until recently their relationships were often exclusive.

But the study by Paladyne Systems, a New York-based hedge fund services provider, found that many hedge funds are eager to work with several prime brokers as they expand trading strategies and seek fresh investment opportunities around the world.

"One can expect to see the increase in prime brokerage relationships from one to two or sometimes three as the manager's capital approaches $1 billion," Paladyne said in the report compiled last month.

Having more than one prime broker -- once a luxury reserved for the industry's biggest multibillion funds -- will soon become a necessity for all but the very smallest funds with only a few million dollars under management, Paladyne said.

For years Goldman Sachs and Morgan Stanley were the biggest prime brokers, servicing roughly 60 percent of the market. But recently others like UBS began muscling in and even smaller niche players are taking some market share, industry researchers said.

By using more than one prime broker, hedge funds hope to get not only better service but also lower fees, something they themselves are being pressured on by clients like pension funds and even wealthy individual investors, managers said.

Hedge fund industry assets have doubled to more than $1 trillion in the last five years and are expected to double again in the next two to four years, researchers found.

Already larger hedge funds with more than $1 billion in assets said they generally use more than four prime brokers, according to a 2004 study performed by Global Guardian.

Ongoing growth in the industry will also benefit companies that supply financial services to prime brokerages.

While hedge fund managers tell clients that they can get better service and more insight into their trading by using more than one service provider, that may not always be true, both managers and industry lawyers have said.

It is easier to hide positions among a number of prime brokers and the chance for error -- made either at the hedge fund or the prime broker -- increases with multiple brokers.

Also, portfolios will have to be reconciled more carefully if more than one broker is used, Paladyne said.