According to Financial Times, The Goldman Sachs Group Inc. (GS) is on the verge of selling its hedge fund administration business to State Street Corporation (STT). 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 range.
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, 2012.
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 Citigroup Inc. (C), Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), Wells Forgo & Company (WFC) and Morgan Stanley (MS) 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 stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
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MORGAN STANLEY (MS): Free Stock Analysis Report
STATE ST CORP (STT): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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