Why Wall Street Will Love The 3% Solution in Reform Bill
Although the final text of the rule is not yet available, it appears likely that banks will still be able to charge fees based on the total amount of assets managed by the hedge funds they sponsor as well as collect a portion of the gains. It also appears that employees of banks that sponsor funds will not fall under the 3% limit.
This means that to the extent Goldman executives, for example, want to capture more of the upside of a particular fund for themselves, they can simply invest as individuals rather than put in more firm money. To the extent that the rule requires banks to sell down outsized stakes in some of their sponsored hedge funds, many of these sales may be to their own employees.
There will certainly be big changes in bank sponsored hedge funds, with banks required to sell off stakes in funds in which they’ve taken a large positions. But when it comes to marketing new funds—or even changing the rules governing a bank’s commitment to hold a big stake in an existing fund—banks will now enjoy the privilege of not having to put too much of that proverbial skin in the game.