Alternatives: Goldman vs. JP Morgan

Chidem Kurdas

Do alternative investments, primarily private equity and hedge funds, have a future at investment banks? The impact of new regulation is not yet fully observable. So far, Goldman Sachs and JP Morgan Chase present different pictures.

Goldman’s alternative assets under management continue to shrink and are down 4% from December 2010, to $142 billion. This is a factor in declining incentive fee revenue, which in turn is a factor in declining overall revenue.

JP Morgan’s alternative assets went up 5% from December 2010, to $113 billion.  There’s growth, though stalled in the fourth quarter and slow in general. Highbridge Capital, the bank’s  $26.6 billion hedge fund business, is reportedly trying to raise $3 billion for a second mezzanine fund.

If you consider the two banks over time, Goldman was more active in alternatives than JP Morgan and still runs a greater amount of alternative assets, but it looks like trending down. Then again, Goldman chief financial officer David Viniar argues that most of the current changes are cyclical, not a secular trend, and will reverse as the cycle turns.

As for new regulation, the Volcker Rule of the Dodd-Frank Act should have greater effect on JP Morgan, a depository institution that is in theory subject to the restriction on hedge fund and private ownership and prop trading, than on Goldman, not a depository institution. But the structure of a company matters. Besides, regulators are still working in how to implement the rule.


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