Goldman CFO sees end to hedge fund redemption wave

NEW YORK (Reuters) - Hedge fund assets may be on the rebound after a year of massive redemptions, Goldman Sachs Group Inc Chief Financial Officer David Viniar told analysts on Tuesday, although the prime brokerage business will remain under pressure.

"Assuming (hedge fund) performance stays OK -- which it has been through the first half of this year -- it feels like we are pretty much through the redemption cycle, and it actually looks like you are going to start to see some money flowing into hedge funds," he said during a conference call.

The hedge fund business suffered record withdrawals at the end of 2008 as markets imploded, sending the industry's assets under management down by about 40 percent.

Yet as markets rebounded this year, so did first half performance and the outlook for hedge funds.

One of the world's largest prime brokers, Goldman provides financing, trading and other services to hedge funds. The securities services business, posted a 38 percent drop in second quarter revenue to $615 million driven mainly by shrinking prime brokerage customer balances.

"Given the industrywide reduction in hedge fund assets and leverage, the results within our securities services business were lower than in prior years," said Viniar, who told analysts the environment for this business remains "challenging."

Investors pulled $103 billion out of hedge funds in the first three months of 2009, further shrinking the size of the once red-hot asset class to $1.3 trillion. First quarter redemptions slowed from the record $152 billion removed during the fourth quarter.

The hedge fund industry now manages $600 billion less than it did at its peak during the middle of 2008.

GOLDMAN ALTERNATIVES SHRINK

Along with securities services, Goldman's asset management businesses was a drag on otherwise sterling quarterly results.

Revenue from asset management -- which includes investment funds sold to outside investors, private wealth management and merchant banking -- fell 21 percent to $922 million from last year, reflecting plunging markets last year.

Total assets under management fell 8 percent to $819 billion from last year, although they rose 6 percent in the June quarter amid resurgent markets.

The "alternative" investment business -- real estate, private equity and hedge funds -- suffered $2 billion of net outflows in the June quarter, on top of $2 billion of net withdrawals in the first quarter and $2 billion during the month of December.

The bank ended fiscal 2008 with net inflows of $8 billion into alternative funds, but that is down from $9 billion in 2007 and $32 billion in 2006.

Goldman does not break down the components of its money management business and a spokeswoman declined to elaborate on Viniar's comments or the firm's minimal disclosures.

Goldman has not launched a new hedge fund since January of 2008 and some of its largest funds -- such as former flagship Global Alpha -- have struggled in the past two to three years. Goldman's Whitehall Funds have suffered with the decline in commercial real estate.

But some of the outflows reflect broader investing trends. Traditional equity funds saw $1 billion in net outflows during the June quarter, but fixed-income funds received $6 billion of net new money as the crisis slashed debt prices and fueled interest in distressed credit funds.

Money markets, cash-like investments that can come and go quickly, received $3 billion of new money in the quarter.

The largest surviving Wall Street bank remains by far one of the world's top money managers with $819 billion in assets and a top "alternative" investment manager with $142 billion.

(Reporting by Joseph A. Giannone; editing by Andre Grenon)