According to the Wall Street Journal, New York based-The Goldman Sachs Group Inc. (GS) has planned to invest in hedge funds. After 2008 financial crisis, Goldman has molded its way of using its capital. The bank has pooled funds of $600 million from its clients, which included pension funds, wealthy families and large institutions to create a new fund.

Goldman plans to use the new fund for providing start-up money to hedge-fund managers varying from 8 to 10 new hedge funds. Moreover, in each hedge fund Goldman would invest $75 million to $150 million from the new fund created, which in turn, is expected to raise approximately $1 billion in total.

Hedge fund is a portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns. Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a initial minimum investment. Investments in hedge funds are illiquid as they often require investors to keep their money in the fund for at least one year.

Overall, this new venture would be beneficial for the bank. It would earn fees on the total amount managed by the fund coupled with fees generated from hedge funds’ business conducted through bank’s trading unit. On the other side, investors will gain due to the hedge funds’ profits, excluding a percentage of the hedge-fund managers’ fees.

According to the Journal, Goldman fund has already started working. In September, the fund invested approximately $100 million in a New York-based hedge fund called Palestra Capital Management LLC.

Previously, Goldman and a number of its peers, such as Morgan Stanley (MS) and J.P. Morgan Chase & Co. (JPM), bought hedge funds in expectation of high returns. But unfortunately, at the peak of 2008 financial crisis, they incurred huge losses.

On the regulatory front, the new fund has no limit on investment or trading as Goldman is using only clients’ money for the venture rather than its own money. Moreover, the existing goodwill of Goldman in the market and its association with hedge funds will facilitate new hedge-fund managers to raise more cash from other investors and from brokers.

In spite of volatile returns in the recent years, the hedge fund industry has bounced back sharply. The assets have outpaced the height reached in 2008 and currently amounted to more than $2 trillion, according to Chicago-based Hedge Fund Research.

Additionally, seeders are raising more cash. According to the results of a survey of about 40 global hedge fund seeders generated by New York-based firm-the Acceleration Capital Group, the total capital projected to be invested with emerging managers in the first half of 2011 was expected to be around $2.5 billion, double the amount expected in comparable survey showed in 2009.

Further, the business of seeding hedge funds is expanding as large number of money managers is interested in raising new funds and investments from large financial institutions.

Goldman currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating. Moreover, considering the fundamentals, we are maintaining a long-term Underperform recommendation on the stock.

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