23/06/2010 Author: Shannon Hawthorne

US banks plan hedge fund moves despite ‘Volcker Rule’

Two major US banks are ploughing ahead with their respective plans to buy and raise funds for hedge funds, despite proposed US regulation, which, if passed, could prohibit them from doing so.

JP Morgan Chase, which already owns hedge fund firm Highbridge Capital Management, is said to be in talks to buy Gávea Investimentos, a $5.3bn Brazilian hedge fund and private equity firm, while Citigroup recently announced plans to raise around $3.5bn for its hedge fund and private equity units over the next two years.

The decisions come in spite of the impending ‘Volcker Rule’, which seeks, in part, to limit US banks’ ties to private equity and hedge funds, as well as prohibiting any proprietary trading that is unrelated to client needs.

The current wording of the legislation is somewhat unclear, and while some interpret it as banning US banks from directly investing in hedge funds, others believe that it would also prohibit them from owning such funds, a proviso which would impact on a number of major US institutions, including Bank of America and Goldman Sachs.

The recent actions taken by JP Morgan and Citigroup have been widely interpreted as a sign that the banks do not expect the final version of the Volcker Rule to prevent them from buying and owning hedge funds.

However, according to Christopher Miller, CEO of industry consultant Investment Quotient, until the legislation is finalised, these banks have no choice but to continue with business as usual.

“Until it’s known for sure, it would be foolish to suspend particular operations,” he told HFMWeek.

“Ultimately, it’s going to be very important that the US administration tries to implement legislation which punishes excessive risk-taking, but isn’t going to restrict responsible business that improves investment banks’ solvency and resilience”