To understand this consider the potential impact that the 3% rule will have on Goldman Sachs whose Tier 1 Capital of 12.2% at Dec 31, 2009 translates into a figure of $52.7 billion. Under the 3% rule, Goldman’s investible limit in hedge and private equity funds would be less than $1.6 billion. This compares with Goldman’s estimated proprietary investments in these areas, according to Citibank, of over $29 billion. The story is similar, if in smaller proportions, across the US banking sector. Citi found that JPMorgan, Bank of America, Morgan Stanley and Wells Fargo – with $33 billion in private equity and hedge fund investments – have almost triple what the 3% rule allows. Ironically, only Citi, with just $1.4 billion in principal investments (which account for 1.5% in Tier 1 Capital according to research from Goldman) is within the threshold. Spin-offs and divestments will be extensive.
For now it looks like the stakes banks have in the management companies of external hedge fund managers can continue. Thus Morgan Stanley should be able to escape a fire sale of its subsidiary FrontPoint Partners and of its minority interests in Lansdowne Partners, Avenue Capital and Traxis Partners. Goldman should also be able to retain its interest in the Petershill Fund, which has acquired stakes in several firms, including Winton Capital. But by limiting prop investment and thus banks’ ability to seed new hedge funds, the rules will help to entrench the status quo and may be a drag on innovation. In sum, the overall outcome is relatively benign for hedge fund sponsorship, but more restrictive on proprietary trading and principal investments.
It seems that hedge funds have a generational opportunity to enhance trading margins in some markets and perhaps develop new businesses in areas like distressed that may change substantially as banks like Goldman narrow the scope of their activities. Hedge funds, of course, will be forced to register with the SEC from next year, but that looks like a price worth paying given the opportunities the reforms offer.
Turning to our July/August issue, we interview Tony Chedraoui and take a close look at his event-driven hedge fund Tyrus Capital – one of 2009’s biggest launches. We also get John Bennett to discuss the approach to equities investing that he’s brought to Gartmore. As well, we publish the highlights from our recent conference on Harnessing the Potential of UCITS Hedge Funds.
Bill McIntosh, Editor
bill.mcintosh@thehedgefundjournal.com
