Hedge funds wary of deserting wounded Goldman

LONDON/HONG KONG (Reuters) - Hedge fund managers are sticking by an old rule of thumb in the wake of SEC charges against Goldman Sachs. Don't kill the golden goose.

The under-fire investment bank has been trying to soothe the concerns of clients at its prime brokerage business, heading off any attempts by rivals to use the news to capture business.

Industry players say the bank is pushing at an open door.

"Goldman's standing is as strong as it ever was. The question is perhaps, are they too big to upset?," said one senior London-based hedge fund source.

"People are not afraid to move the business to where they think it should be, regardless of who the counterparty is. But obviously nobody wants to upset Goldman ... at the moment they don't have any reason."

Goldman is accused of defrauding investors by failing to say hedge fund manager John Paulson bet against a subprime debt instrument he helped design. The charge has raised concerns about how the U.S. bank prioritizes clients and its own interests.

But hedge fund industry executives in Europe say the bank -- whose prime brokerage unit is headed up by James Paradise in London and John Willian in New York -- still offers services like capital raising, advice, algorithmic trading and derivatives that few can match.

"I don't think this will affect hedge funds use of Goldman Sachs as prime broker ... It's a huge player," said Jerome de Lavenere Lussan, managing partner of hedge fund consultancy Laven Partners. "People who set up hedge funds are really happy if they get Goldman."

And while many hedge funds have increased the number of prime brokers they use in the wake of the collapse of Lehman Brothers in 2008, more than 40 percent of all equity mandates that are 'split' between brokers are with Goldman or Morgan Stanley (MS.N), according to recent data from EuroHedge.

SUPPORT

This week Goldman said on an earnings call to analysts that most customers remained loyal and that "clients still support us." A spokeswoman for the bank declined to comment further.

Prime brokers were falling over themselves to woo back clients they lost during the credit crisis, but funds that desert the bank during its current difficulties may find it a tough task to return to the fold if the dust clears.

"It won't stop anyone doing business with them in the hedge fund world ... no way," said one prime brokerage executive who spoke on condition of anonymity. "I don't think a single client globally will leave."

That prediction doesn't mean Goldman has started counting its chickens, and hedge fund managers in Asia report a swift move into crisis management by the bank.

"Goldman's prime broking team has definitely been in touch by phone, from several directions, and virtually immediately. They were well-equipped with talking points, so a coordinated response," said one Hong Kong-based hedge fund manager.

Calls have been going out from the bank's prime broking sales, capital introduction and client services teams, according to hedge fund sources.

One Hong Kong-based prime broker said there were some signs of scaremongering among Goldman's competitors.

"We have strict instructions from the top that we are not to bad mouth Goldman Sachs to potential clients, but we know of a couple of competitors who are doing that," said the Hong Kong-based head of prime brokerage at a non-U.S. bank.

The industry has become more competitive since the credit crisis, Eurohedge figures show that Credit Suisse (CSGN.VX) has been a big winner, with the biggest share of total European prime brokerage mandates in January with $59 billion of the roughly $400 billion European industry, ahead of Goldman then Morgan Stanley.

However, Goldman leads with the greatest number of mandates and is also positioned top in the area of arbitrage, event-driven, credit and multi-strategy, while Morgan Stanley is strongest in equity strategies.

In Asia, Credit Suisse and Deutsche Bank (DBKGn.DE) have muscled their way into the pecking order as clients cut exposure to Wall Street banks.

(Editing by Joel Dimmock and Jon Loades-Carter)

(Additional reporting by Raji Menon)