Behind Goldman Sachs' new hedge fund strategy

Goldman Sachs (GS), whose name is synonymous with Wall Street to many investors, is ratcheting up the fees it charges to some hedge fund clients and cutting ties with others. Its goal is to set aside more capital to meet tougher government regulations, according to The Wall Street Journal.

Goldman's moves come as Wall Street firms try to mitigate their market risk and adjust to the changing regulatory environment. The giant investment bank has left the commodities trading business and is putting less of its own capital in hedge funds and private-equity funds, among other riskier segments.

Investors in the stocks of Goldman and its ilk, such as JPMorgan (JPM) and Morgan Stanley (MS), are expecting better. The sector has underperformed the broader S&P 500 index this year.

Goldman's decision to put the squeeze on some hedge fund clients didn't come as a surprise to the hedge fund industry.

"Goldman has always focused a disproportionate share of their resources on their top clients," said Donald Steinbrugge, a board member of trade group the Hedge Fund Association, in an interview. He added this isn't the first time it's happened. The clients Goldman is cutting ties with "are probably going to be better off because they will move to other prime brokerage firms that will make them a higher priority."

Former Goldman Sachs hedge fund clients have reached out to the bank's rivals such as Jefferies because they can't operate without the services the banks provide, according to a person familiar with situation. The person also said Goldman's rivals would more aggressively target its customers now that news of the bank's change in strategy was out. Both Jefferies and Goldman declined to comment on this story.

One firm that has welcomed growth in new hedge fund business is Cantor Fitzgerald. Noel Kimmel, global head of prime service at the securities firm, told The Journal his firm has seen an increase in "existing client activity" as well as overtures from potential new clients.

Hedge funds overall are growing, thanks to a booming stock market. According to Hedgefundresearch.com, investors have allocated $30.5 billion in new capital to the industry, topping the $26.3 billion they allocated in the first quarter. That's the most money invested in hedge funds since 2011.

  • Jonathan Berr

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