Reply #39: Banks' love affair with hedge funds [View All]

[54anickel]

Large banks are eager to manage their own hedge funds, despite recent blowups like Amaranth.

http://money.cnn.com/2006/10/05/news/companies/banks_hedgefunds/index.htm?source=yahoo_quote

NEW YORK (CNNMoney.com) -- Hedge funds have come under fire in recent days, owing in part to the recent $6 billion Amaranth debacle. But the regulatory run-ins aren't scaring off large banks, which increasingly are turning to hedge funds as a way to create serious growth.

As increased competition for deposit growth and a flattening yield curve continues to put pressure on profits, banks are eager to attract high net-worth clients and diversify their profit stream.

And while banks like Goldman Sachs (Charts) and Morgan Stanley (Charts) have had success in their prime brokerage units, which cater in part to servicing hedge funds, analysts say the big bucks lie in the management of actual hedge fund assets.

Just look at the numbers: Hedge fund managers collect 2 percent of the assets under management regardless of the fund's profitability. If a fund shows a profit, its managers receive an additional 20 percent as a performance fee.

For the banking industry, which is concerned about dwindling profits and higher interest rates, that type of fee structure is particularly appealing, analysts said.

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The banking industry is in the business of gathering money wherever it may exist," said Bove. "If the money now exists in hedge funds, it's incumbent on the banking industry to get into that business."

But banks are doing more than just getting in to the business. They're now becoming leaders within the hedge fund industry.

Banking titans Goldman Sachs and JPMorgan (Charts) Asset Management - through JPMorgan's majority stake in Highbridge Capital Management - are currently the largest hedge fund firms in the United States, according to a recent survey by industry magazine Absolute Return.

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Hmmm, I dunno if it's the call of profits alone on this one. Goldman Sachs and JPMorgan...that thin veil between the big 3 and the CB comes to mind again. Could this be some sort of "pre-emptive, containment" move?