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Investment banking: Goldman suffers from over-exposure to hedge funds

The US firm's business mix is making it more difficult to bring success in the primary markets

Has Goldman gone too far down the hedge fund path? That question is not directed at its latest trading results, although its strength with hedge fund clients as much as its reputation for proprietary trading both played their part in Goldman's trading earnings falling 43% between the first and second quarters.

Rather it's a comment on Goldman's recent performance as an underwriter of equity deals. Whether France Telecom in Europe, or Lazard, Boise Cascade and IHS in the US, in the last couple of months Goldman has been involved in some of the more high-profile bad deals, as well as presiding over deals pulled at the last minute.

No bank is immune, and May, when many of the problem deals and non-deals occurred, was hardly the easiest month.

But could the explanation lie in the direction Goldman has taken its equity business? A mix of the 2000 crash, low IPO volumes, ever-decreasing margins for secondary trading and New York attorney general Eliot Spitzer's attacks on research challenged the profitability of almost every bank's equity division.

Goldman cut back research as well as focusing its attention on a profitable but narrow client base.

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