Will Goldman Become the Next Public Hedge Fund?

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[Editor’s Note: We’re launching some new regular features and “The Big Idea” is the first of them. That nifty logo you see to the left will tip you off that we’re about to engage in speculation, guess-work and commentary about the Big Idea of the day, the week or the month. This isn’t the realm of breaking news or even linking to news broken elsewhere. The inaugural Big Idea begins by asking what seems an obvious question in light of all the talk of hedge funds and private equity firms going public: What about Goldman Sachs?]
"Will a hedge fund become the next Goldman Sachs," asks Jenny Anderson in today’s super special DealBook Section of the New York Times. There are all sorts of problems with this idea, not the least of which is that while the hedge fund in question—Citadel—is growing in all sorts of new and strange ways it hardly seems to be growing into anything like a full-fledged investment bank. “Citadel has elements of an investment bank disguised as a hedge fund, minus the investment bankers,” Jenny admits. So, yeah. No. Not an investment bank. Not Goldman Sachs.
We can't help but wonder, "Could this work the other way around?" With all the talk of hedge funds and private equity going public, one story that’s been overlooked is the possibility that Goldman Sachs might spin off its hedge fund business. Goldman broke new ground when it abandoned its traditional partnership structure and let the public buy pieces of its equity at the turn of the century. But that was then, and this is now. And surely Goldman Sachs has not reached its Hegelian end-state. The end of history of the history of Goldman is a ways off yet, and the next step might be a spin-off of its profitable trading business.
That will come as a shock to some who have come to regard Goldman Sachs as a hedge fund disguised as an investment bank—but is it really so far-fetched? But the proprietary trading business—basically, Goldman trading for Goldman—has been a strong profit and growth engine for the bank, so strong that some wonder whether this piece might be far more valuable as its own entity.
Surely there are some people inside Goldman Sachs proprietary trading business wondering just how much their little corners of the investment bank might be worth if it wasn’t dragged down by the fee-gobblers in investment banking and credit groups. A free-standing GS Prop Trade would surely face some risk from facing the markets without security of Goldman’s other businesses behind it. But these guys are risk machines, and have been ratcheting up their risk tolerance for some time.
Would the rest of Goldman let the traders go? Perhaps. A spin-off might also help the other businesses at Goldman. It could refocus those parts of the firm that remain behind on their core business, and eliminate the always present suspicion that while a clients dealt with one side of Goldman the other side might very well be trading against the client’s interests.
What’s more, it would empower the investment bankers over the part of Goldman they get to keep. With the departure of Hank Paulson and the rise of Lloyd Blankfein and his trader buddies, some other parts of Goldman have been chafing. There were, of course, those old reports of the partners fighting like ferrets. Could divvying up Goldman bring peace to Broad Street?
We haven’t heard anything more than cocktail party chatter along these lines—and we’re not sure you should place all that much confidence in the opinions of the sort of people who attend the sort of cocktail parties we frequent. The recent performance of Global Alpha—down 2 percent for the year when hedge funds have had an average gain of 1.9 percent—probably isn’t exactly lighting a fire beneath the fannies of would be Prop Trading Secessionists. But, you know, it’s in the air.
And we can’t help but smile at the ironic image of Prop Trading stealing away into the night with its own spin-off at the very time when Goldman’s investment bank is out pitching so many other hedge funds and private equity firms on their own IPOs.

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