This month Goldman Sachs Group Inc. (GS) began unwinding its investments in hedge funds to comply with the Volcker Rule’s ban on banks holding stakes of greater than 3% of the assets of any single fund.
The process will take more than two years. The Wall Street firm detailed its plans with the Securities and Exchange Commission in correspondence with the agency last year. It will redeem up to 10% of its stakes in certain hedge funds each quarter over ten consecutive quarters, starting in March 2012 and ending in June 2014.
Goldman also told the SEC it was limiting initial investments in certain new funds to 3%.
The correspondence was posted on the SEC’s website last week, though the plans were also disclosed in securities filings.
Goldman manages $20 billion of hedge fund assets for clients in its Goldman Sachs Asset Management division. The firm’s own investment in hedge funds was valued at $3.2 billion at the end of December, according to its recent annual financial filing, in strategies including long/short equity, credit, convertibles, risk arbitrage, special situations and capital structure arbitrage, the filing said.
Its Petershill fund invests in several outside hedge funds, including Partner Fund Management, Mt. Lucas Management, Winton Capital, Altana Wealth, and Capula Investment Management.
Goldman didn’t disclose which funds would be affected by the unwinding. Some of its stakes don’t cross the 3% threshold.
The Volcker Rule, which is part of the Dodd-Frank financial reforms, prohibits banks from proprietary trading and from owning or investing in hedge funds over a certain threshold, though its exact scope hasn’t yet been finalized.
“We plan to review these expectations when the detailed scope of the prohibitions, permitted activities, exceptions and exclusions related to sponsoring and investing in private equity and hedge funds are known with certainty,” Goldman said in a June 30, 2011, letter to the SEC.
In 2010, Goldman shut down its Principal Strategies proprietary trading desk, with several traders moving to a new fund at KKR & Co. (KKR). Last year it wound down its global macro proprietary trading business within its fixed income, currency and commodities trading operations.
Two years ago Goldman shut down its Global Equity Opportunities fund, which once had more than $7 billion of assets, after being decimated in the credit crisis. Its once $12-billion-asset Global Alpha Fund was shut down last year after its assets dwindled.
Reducing investment stakes may improve capital ratios, said analyst Roger Freeman at Barclays Capital, but there is a flip side. Private equity and hedge fund stakes as well as trading helped juice Goldman’s return on equity before the financial crisis.
Reducing or eliminating exposure to those activities “caps the upside that we saw in the peak quarters before the credit crisis,” Freeman said.
In a May 26, 2011, letter to Goldman, the SEC asked the bank to disclose the extent to which hedge fund and private-equity investing had been terminated or disposed of as well as steps the firm planned to take.
Goldman outlined its plans in a June 30, 2011, reply letter.
