Hedge fund balances at the prime brokerage business at Goldman Sachs reached record levels in the first quarter after the bank avoided major losses from the collapse of Archegos Capital Management.
Equities financing revenues at Goldman Sachs soared 65% year-on-year to just over $1.1 billion reflecting increased activity during the period, including record average balances in the prime business.
Stephen Scherr, chief financial officer at Goldman Sachs, said on the institution’s first quarter earnings call that while average balances grew to record levels, it is difficult to be more precise on the bank’s overall balance sheet exposure.
“I would say that our business has skewed historically to the long-short and less so competitively relative to the quants,” he said. “Our ambition is to continue to grow it, but that growth is not going to happen absent corresponding risk… We are very aware of the embedded risk and liquidity consumption in that book.”
David Solomon, CEO of Goldman Sachs, also warned on the call that the recent Archegos Capital scandal will likely not be the last the industry will see, but risk controls the bank put in place before the March events had worked well.
“We have robust risk management that governs the amount of financing we provide for these types of portfolios,” Solomon said. “We identified the risk early and took prompt action consistent with the terms of our contract with the client. I am pleased with how the firm handled it.”
Goldman Sachs had avoided being entangled in the collapse of Archegos Capital last month, while several other major banks that had acted as a prime broker for the $10 billion family office suffered huge losses.
According to reports, Goldman Sachs was the first to sell a huge chunk of its portfolio, triggering a $20 billion stock fire sale that shook markets as the banks sold off the fund’s positions after it defaulted, prompting multi-billion-dollar losses at Credit Suisse and Nomura.
Losses for Credit Suisse and Nomura had been significantly higher than the other prime brokers as they were not as quick to offload positions. According to reports, Goldman Sachs, Morgan Stanley, and UBS were able to sell positions much quicker.
Solomon added on the bank’s earnings call that while it is too early to speculate on the impact of the scandal, including if some players may retreat from the business, he expects regulators to take a closer look at the events.
“Given the visibility of this, I do think there will be regulatory discussions around it and we will participate constructively in those discussions,” he said. “I do think to some degree, this was a one-off event – we see from time-to-time people get overly concentrated, they have too much leverage and that leads to unwinds.”
Revenues across the equities business at Goldman Sachs surged 68% in the first quarter this year compared to the same period last year to $3.69 billion. The bank said the results reflected significantly higher net revenues in derivatives and cash products, as well as higher average client balances in its prime business.