Goldman Sachs to reduce hedge fund client numbers

One little-discussed byproduct of this financial crisis in hedge fund industry is broker business. As many brokers are ally with hedge fund in bull market, now brokers turn their face and are against hedge funds. Goldman Sachs is cutting back the number of its hedge fund clients in an indication of tougher market conditions and of the changes sweeping through what was once the premier investment bank. Their ability to leverage themselves has been affected by their new reiteration. They are reviewing many of their relationships.

That review is especially intensive for hedge funds pursuing strategies that involve trading securities that aren't very liquid, such as convertible bonds, or that rely on the massive use of borrowed money, such as the computer-driven strategies that seek to profit from small price discrepancies. During the bull market, such strategies appeared liquid and borrowing was cheap. But in recent months, prime brokers raised the cost of funding and many hedge funds were forced to sell convertible and junk-rated bonds that dealers can't readily lend.

For the first time, as opposed to annually, clients are asked by Goldman to move off their platform.

These cutbacks are believed to have more to do with the changing of hedge fund circumstances and market conditions than Goldman's changed circumstances. Goldman's shrinking prime brokerage is adding to consolidation in the business of catering to the needs of hedge funds. Other banks pick up market share and at the same time, consolidation is leading to higher pricing, adding pressure on hedge fund performance across many strategies.