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Goldman Sachs Group, Inc. (NYSE:GS) is currently in talks with State Street Corporation (NYSE:STT) to discuss the possibility of a sale of Goldman’s hedge fund division.  The details are not yet final but we do know that the deal does come with fund accounting, valuation and risk management for hedge funds.

As far as we know right now this sale does not include the firm’s prime brokerage division, which provides  a clearing facility to hedge funds.

One thing that is important to note is that the SEC has stepped up regulation and supervision of companies that have ties to hedge funds, especially after the 2008 crisis and the Bernie Madoff scandal.  However, State Street is not new to hedge funds.  The bank purchased Mourant International Finance Administration back in 2009 and they inherited $170 billion in hedge fund and private equity assets.

Many analysts see this as a plus for Goldman Sachs because as stated earlier, the SEC watches big banks and their roles with hedge funds.  Analysts admit that the new regulations and oversight is not worth the small amount of profit that the funds generate, so the best thing to do if you are Goldman is to sell your hedge fund business and get the watchdog off your back.

As for State Street, the bank had $506 billion in hedge fund assets as of the end of March.  According to the Financial Times, if this purchase goes through, State Street will have $700 billion in hedge fund assets.  It is unclear as to the reasoning behind State Street’s build up of hedge fund assets but you can bet the SEC will increase their surveillance of the bank.

Goldman was one of the few underwriters of Facebook Inc (NASDAQ:FB) that managed to escape the legality of the IPO and ultimately cash in.  In fact, it seems as though Goldman is one of the few institutions that actually made money on Facebook.

Surprisingly, Goldman has remained out of the crosshairs in recent months as attention has turned to JPMorgan Chase & Co. (NYSE:JPM)’s $2 billion trading loss and Morgan Stanley (NYSE:MS)’s Facebook nightmare.  This sparks the debate of the new “bad bank” on Wall Street.  Goldman Sachs was the obvious target for many years however, it can be seen that Goldman has actually been cleaning up their act while some of its peers have been getting sloppy.

The bottom line is that Goldman Sachs is smart to sell its hedge fund business.  Currently, the investment bank doesn’t get a huge chunk from its hedge fund business but it does keep the SEC around so it’s a good plan if they do end up selling it to State Street.