How Goldman Sachs makes money on its top traders — after they quit
Goldman Sachs, one of the most profitable banks in the history of Wall Street, figured out a way to monetize relationships with its star traders, even as they left the firm in the wake of the financial crisis.
Goldman (along with other big banks) still had to find an opportunity to monetize ex-star traders. So it added its own stars to its own hedge fund platforms, which let Goldman simultaneously earn fees from valuable client relationships and make money from hedge fund managers that were quitting to launch their own funds.
But lets step back for a second.
Goldman Sachs’ trading desks once fueled massive profits for the investment bank — but that changed once regulators began forcing banks to dial down risk and instituted the Volcker Rule banning proprietary trading.
As a result, one trader who used to work at Goldman said that, post-crisis, there was an exodus of talent, leading to some of the bank’s top earners leaving to launch their own hedge funds.
“People ran for the exits,” after realizing the financial crisis would hamper the bank’s trading profitability, as well as their pay, said one ex-Goldman trader.
That trader, too, has since launched his own fund. But he still maintains a relationship with Goldman Sachs. Many ex-Goldman traders do, he said, once they split off from the bank.
And that’s just the way the bank likely wants it.
Goldman did not respond to requests for comment for this story; the ex-Goldman trader spoke with Business Insider under the condition that he, as well as his hedge fund, were not named, because he was not authorized to discuss his marketing relationship with the bank.
Speaking at the SALT Conference in Las Vegas last week, though, Howard Nifoussi, who serves as vice president of alternative investments at the bank’s investment management division, told attendees that in the last six years, his team has grown from zero to 19 people as it connected Goldman’s top clients with hundreds of leading hedge funds.
There is a fee that goes along with Goldman’s connections — but the bank doesn’t disclose what it makes linking high-net-worth clients to the hedge funds run by its former star traders.
Another source, which competes with Goldman for clientele (and for access to the same funds as the big bank) said that in terms of its reach to hundreds of hedge funds, as well as the talent of the traders, “Goldman is number one.”
Still, the source said, “they’re not going to make as much as they would have,” were Goldman allowed to operate hedge funds on its own balance sheet.
Last year, Goldman Sachs’ trading revenue was less than half what it was in 2009. What was once nearly $22 billion in annual fixed-income trading slipped to less than $9 billion.
That’s a steep drop for what once was the top bank’s largest line of business.
Goldman isn’t alone: in the wake of the financial crisis plenty of other Wall Street banks launched hedge fund platforms that served a number or purposes for all involved. At SALT, Nifoussi was joined on the hedge fund platform discussion panel by bankers from Deutsche Bank and Morgan Stanley.
For investors, banks' hedge fund platforms allow them to buy into hedge funds with less money than would be required ($1 million, or more, ordinarily). The catch, is that they must already have at least $25 million invested with the bank, at least in Goldman’s case.
For banks, they took the opportunity to capture revenue on fees to hedge funds formed by their fleeing stars — a pittance, compared to what banks could have made running bigger trading desks, as they had pre-crisis, but a top-line victory, nonetheless.
“They need to replace that revenue” from the businesses the bank has been shooed away from by regulators, said the ex-Goldman trader.