The Goldman Sachs Group Inc.
) is on the verge of selling its hedge fund administration business
State Street Corporation
). The deal is expected to be closed at the end of this month,
though no agreement has been reached.
Upon closure, the combined business would have $700 billion
worth hedge funds under administration. Currently, Goldman's hedge
fund unit has $200 billion of assets.
Moreover, Goldman has more than 500 hedge fund clients and about
250 employees worldwide, working from big offshore centers. On the
other hand, State Street's fund administration business has assets
worth $500 billion.
Hedge funds are portfolio of investments using highly developed
investment strategies such as leveraged, long, short and derivative
positions in both domestic and international markets with the aim
of generating high returns. Valuation of hedge funds is calculated
as a share of the fund's net asset value.
Hedge fund administration involves the process of valuing
portfolios and reviewing levels of risks related to investments. In
last few years, hedge funds business has grown drastically in the
U.S. with the employment of third-party service providers on a wide
According to the Securities and Exchange Commission (SEC) filing
in May, Goldman has also stepped forward to comply with the
'Volcker Rule', which is anticipated to be implemented on July 21,
Volcker Rule, a specific section of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, requires banks to restrict
their investments in hedge funds and private equity funds.
Proprietary trading is also prohibited under this rule.
Implementation of Volcker Rule would affect the overall earnings
of banks. Goldman earns management fees and incentive fees for
providing investment management services to private equity and
hedge funds. The bank also invests in funds, which yield gains or
losses on sell-off. Such earnings of Goldman would be impacted by
the Volcker Rule and therefore, the bank has decided to divest its
hedge fund administration unit.
Goldman is going to abide by the Volcker rule by selling part of
its investments in hedge funds. The bank has redeemed $250 million
worth hedge funds during the first-quarter 2012. Further, it plans
to redeem approximately 10% of certain hedge funds every quarter
till June 2014.
Apart from Goldman, many other U.S. banks, such as
Bank of America Corporation
JPMorgan Chase & Co.
Wells Forgo & Company
) are also trying to reduce their investments in hedge funds and
private equity. These banks are considering a number of options to
go along with the rule.
Goldman currently retains a Zacks #3 Rank, which translates into
a short-term Hold rating. Further, considering the fundamentals, we
are maintaining a long-term 'Neutral' recommendation on the
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