Exclusive: Goldman Sachs plays catch-up with hedge fund offering

Goldman Sachs Group is taking a page from its Wall Street competitors in bringing a new hedge fund product to market.

The firm has begun offering its wealthiest customers the opportunity to invest in about a half-dozen hedge funds, according to regulatory filings, including well-known names like Brevan Howard and Jana Partners, without having to go to the funds themselves, which require much higher minimum investments.

The new offering, called Hedge Fund Select, is similar to products that other big brokers like Morgan Stanley, Citigroup Inc and Bank of America Corp's Merrill Lynch division have offered for many years.

But the model is new to Goldman, which has historically preferred to market its own hedge fund products, or steer customers into a so-called fund-of-funds that spreads money between an array of portfolios.

Over the years, some clients of Goldman have complained that the firm's own hedge funds have performed poorly, while its outside hedge fund offerings were not as robust as those at other Wall Street firms.

With the new arrangement, Goldman clients who have $25 million or more with the investment bank can invest in the funds on the Hedge Fund Select platform, according to a person familiar with the product. There is a minimum $500,000 investment in any single fund, and Goldman will earn a 1 percent fee on the money invested with any particular fund.

A big name hedge fund typically requires an investor to put in at least $1 million. A bank that boasts a hedge fund platform can reduce the minimum investment needed because it pools all its customers' money together into a single portfolio.

And Wall Street hedge fund platforms sometimes offer shorter redemption periods than the underlying funds.

So far, 10 funds have been incorporated for Hedge Fund Select, which Goldman began rolling out this summer. Regulatory filings with the U.S. Securities and Exchange Commission show that Goldman has begun raising money for five funds, and a person familiar with the situation said the firm may offer its customers as many as a dozen hedge funds to choose from.

Goldman spokeswoman Andrea Raphael declined to comment.

Goldman has been making subtle changes to its $836 billion asset management division for the past couple of years in an effort to boost profits as fees have declined and some of its own funds have struggled to produce big gains. Goldman Sachs Asset Management (GSAM) underwent a management overhaul last year and shuttered its Global Alpha Fund after the quantitative fund lost more than $10 billion from its 2007 peak.

The new hedge fund offering is being rolled out at a time when the hedge fund industry has lost its swagger as the smartest investors on Wall Street. Through the end of August, hedge funds gained around 4 percent, lagging well behind total returns of 13.5 percent in the benchmark S&P 500 index, according to Credit Suisse.

The effort by Goldman appears to be getting off to a slow start. An SEC filing reveals that a Hedge Fund Select portfolio that invests in a Brevan Howard fund had raised just $500,000 as of August. And a Hedge Fund Select portfolio that invests in an Eminence Partners Fund had raised $2 million.

Other managers on the Hedge Fund Select platform that have already raised capital include Bocage Global Resources, a commodity-focused fund run by former Caxton Associates trader Kurt Billick, and New York-based Select Equity Group, which specializes in trading stocks.

Corsair Capital and Brigade Capital Management have also registered an entity with the GSAM entity, according to a filing with the SEC.

The hedge funds Goldman is offering to its customers either declined to comment or were not immediately available for comment.

The new hedge fund offering is consistent with the terms of the Volcker rule, which allows Wall Street firms to offer hedge funds but limits the amount of firm capital that can be invested in those funds.

(Reporting By Katya Wachtel and Lauren LaCapra; Editing by Matthew Goldstein, Jennifer Ablan and Tim Dobbyn)

By Katya Wachtel and Lauren Tara LaCapra

Partner Area