Key points
- Goldman reportedly earned over $200M this year
- The fund reportedly became its top prime brokerage client
- The same fund nearly collapsed in July
- Goldman stayed on as one of the fund's brokers
Goldman Sachs (GS) earned more than $200 million in fees this year from lending to Leopold Aschenbrenner's hedge fund, Situational Awareness, and the fund became the biggest client of Goldman's prime brokerage business, the Financial Times reported on Thursday, citing people familiar with the matter. The FT described the firm as barely two years old.
The figure shows how valuable a heavily trading, leveraged fund can be to its banks. Situational Awareness's July losses raise a separate question: how much business remains after the borrowing is cut back?
A prime broker is the bank a hedge fund leans on for its day-to-day plumbing. It lends the fund money to buy more stock than its own cash would cover, lends it shares for bets against a stock, holds its assets, and handles its trades. Each of those services carries a fee or an interest charge. The more a fund borrows and trades, the more the prime broker earns. Situational Awareness borrowed a lot.
What changed after July
Borrowing amplified the damage when the fund's positions fell. Situational Awareness lost about 67% of its value in July. Margin calls, which are demands from lenders for more cash when positions fall, forced the fund to sell most of its public stock book to Citadel on July 30. Goldman was one of the fund's three prime brokers at the time, along with Bank of America and JPMorgan Chase.
Since then, the banks have had their own follow-up. In August, the SEC sent subpoenas to four banks, Goldman included, seeking records on the fund's trading and its dealings with lenders, the New York Times reported. Neither the fund nor any bank has been accused of wrongdoing. In September, JPMorgan ended its lending relationship with the fund. Goldman, Bank of America, and Citigroup remained active brokers, according to Reuters.
The fund has also started working with Clear Street, a smaller New York broker, and Aschenbrenner has told brokers the fund plans to use significantly less borrowed money than before. Less borrowing could reduce Goldman's financing revenue from the fund. But without a breakdown of the fees, it is difficult to judge how much its total revenue from the relationship might change.
