Goldman’s Empty Promises

Goldman, on the back foot about the truly abysmal performance of its Global Alpha fund, is trying to shore up investor confidence, or more accurately, forestall a revolt. However, a Wall Street Journal article reports that they aren’t taking the sort of measures they did in August with the troubled Global Equity Opportunities Fund, when Goldman orchestrated and participated in an $3 billion infusion of new funds. Nor are they changing the fund’s managers.

No, instead Goldman promises to do better. The Journal provides excepts from a letter to investors:

The letter, which went out last night over the names of Mark Carhart and Ray Iwanowski, the fund’s once-highflying managers, referred to the widespread dislocations across capital markets in recent weeks. The letter said the fund would constrain its borrowing in the future, one of the factors that led to the problems last month, and consider the level of borrowing as a separate risk factor.

Lordie. First we learn that this supposedly sophisticated quant fund lost a bundle on punting in the yen versus the Aussie dollar. Now we find out they didn’t consider the level of borrowing as a “separate” risk factor? Huh? It increasingly sounds like the fund’s managers were once such stars that they were permitted to run a seat-of-the-pants operation, at least in terms of risk control and style adherence (but since the clients were “Asian tycoons, rich families at home and Goldman partners,” and not institutional investors who look very dimly upon style drift, the managers appear to have enjoyed, and taken, considerable liberties).

The letter continues:

The letter also said that as a result of recent volatility, the fund would adjust positions more rapidly. “Our intent is to move aggressively to limit the size of the fund and to increase our agility in times of market stress,” the letter added.

“Increase our agility in times of stress”? “More agility” likely means smaller positions, but that seems inconsistent with an earlier statement:

“Longer term, successful quant managers will have to rely more on unique factors,” the firm’s fund-management division said in a report to clients. “While we have developed a number of these factors over the last several years, in hindsight we did not put sufficient weight on these relative to more popular quant factors.”

So Goldman tells its clients a few weeks ago that it needs to pursue more differentiated trading strategies, but now in effect, is says it needs to take smaller positions. If that is achieved simply by lowering leverage, that may work, but otherwise, they will need to take more positions, which is likely to make it harder for Global Alpha to avoid overlapping with other quant strategies.

But maybe I am making this too complicated. Maybe the managers are simply saying they will trade better in the future. But it they could trade better, they wouldn’t have gotten in this mess in the first place.

Update 9/19. 4:15 PM: No wonder Global Alpha had to write to its investors. The fund lost another 2.8% in in the first two weeks of September. From Bloomberg:

Goldman Sachs Group Inc.’s Global Alpha hedge fund fell 2.8 percent in the first two weeks of September, adding to last month’s record decline on losses from currency and stock trades.

The drop brought the fund’s year-to-date decline to 34.9 percent, said two Goldman investors, who asked not to be identified because the returns aren’t public. The Standard & Poor’s 500 Index gained 0.8 percent in the month through Sept. 14. The fund lost 22.5 percent in August.

Global Alpha is “actively working” to make investment changes more quickly, limit borrowing and rank debt as a higher risk, according to a letter sent to clients yesterday by Mark Carhart and Raymond Iwanowski, the 41-year-old co-managers of the fund in New York. They said they expect “fewer and smaller participants in the quant space,” in which managers make investment decisions using complex computer models.

Global Alpha’s performance has already validated the second half of the prediction, that there will be `’fewer and smaller participants.” If they carry on as they are now, they prove out the first half as well.

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  1. Anonymous

    i think you may be if anything too kind to global alpha. they charged 2 and 20 to emulate japanese housewives …

    ok, they made a few other bets too, but they didn’t exactly work out much better.

    one question: given that historically the rate of depreciation of high carry currencies has not been large enough to wipe out the gains from carry, do almost all quantitative strategies produce positions that overlap heavily with the positions of retail japanese investors? Or was Goldman an outlier?

  2. Yves Smith

    Anon of 1:50 AM,

    Agreed. The problem with the letter was that Global Alpha’s managers presented that they were making real changes.

    Anon of 11:58 AM,

    Actually, I did discuss Global Alpha’s fees relative to those of Japanese investors in an earlier post.

    Many hedge funds are allegedly active in the carry trade, but I have no idea what proportion of quants are in that strategy.

    The problem with the carry trade is that most of the time, it is a profitable strategy, but when the currency moves strongly against you, the correction is violent because so many are suddenly trying to buy the currency in which they have borrowed. Traders can take big losses in 2-3 day periods.

  3. Anonymous

    Has anyone released the quarterly historical performance and companion Assets base for Goldman’s Global Alpha Fund?

    I am wondering if they lost more money in the last year than they ever made in total?

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