Goldman’s Global Alpha Assets May Fall 60% by Year End

Goldman’s high profile and formerly highly successful quantitative hedge fund, Global Alpha, was one of the biggest casualties of turbulent markets in August, shedding 22.5% of its value. The firm orchestrated a shorting up of another one of its quant hedge funds (Global Equity Opportunities), putting in $2 billion of new Goldman money and raising another $1 billion from third parties. The spin was if the proposition had been presented to Goldman by a third party, they would have accepted it).

However, for Global Alpha, which lost another 2.8% in the first two weeks in September, all investors have gotten is a letter promising to do better. Since Goldman kept the same managers in place, it is hard to give that promise much creedence.

Not surprisingly, withdrawals have proceeded apace. A Bloomberg story says may wind up shrinking as much as 60% over 2007 due to further withdrawals.

Another story claimed that Global Alpha was being wound up, but the Bloomberg articles says the firm maintains otherwise.

From Bloomberg:

Goldman Sachs Group Inc.’s Global Alpha hedge fund may lose about $6 billion in assets this year, a 60 percent decline, because of trades that went awry and client withdrawals, according to two investors.

Global Alpha, which entered 2007 with more than $10 billion, lost 37 percent on investments through Nov. 14, most of it in August, said the Goldman clients, who asked not to be identified because the fund’s performance is private. The New York-based company has about $2 billion in fourth-quarter redemption notices, on top of withdrawals through the year.

Goldman, the world’s most profitable securities firm, said last month it won’t shut down Global Alpha, a quantitative fund whose managers, Mark Carhart and Raymond Iwanowski, use computer models to select trades. The fund generated $700 million in fees in 2006, after returning almost 40 percent the previous year.

“Goldman as a firm would like not to have the reputation of shutting things down,” said Geoffrey Bobroff, an independent investment consultant in East Greenwich, Rhode Island. “Smaller isn’t necessarily bad.”….

“Those funds are coming down in size, we’re happy with that, we’re working on making those funds better, and when they’re smaller they’ll be more nimble,” Blankfein said.

It is widely known that profitability of asset managers correlates with the amount of assets in individual funds. If you care about profits, which Goldman does, keenly, smaller is certainly not better.

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  1. Anonymous

    the infusion was for Global Equity Opportunities–focused equity quant fund–not Alpha. Alpha they are letting die on the vine.

  2. Yves Smith

    Anon of 5:03 PM,

    Whoops, you are absolutely correct. I read through the past stories in haste. Have corrected the post.

  3. Anonymous

    Ha! I’ll bet GS is shorting for their own accounts the same things they’re buying for clients in those funds ;) Dang, they smart!

  4. Anonymous

    Baruch of Ultimi Barbarorum gave the most convincing explanation of the Demise of the Quants last August, which has now become the conventional wisdom. The quants of course were all doing statistical arbitrage, relying on mean-reversion strategies. Except it turns out, everyone has a ton of computing power nowadays and everyone was datamining and numbercrunching the exact same historical trading data and consequently ended up taking largely the same positions. And naturally they were all leveraged up to their nostrils to goose the returns. All it took was one fund heading for the exits and the great unwind was afoot, and we got “six standard deviations” and “thousand-year events”. No black swans here as it turns out, just a herd of elephants trying to stampede through the same narrow exit door.

    The Goldman letter mentions that the fund will “constrain its borrowing in the future” and “increase our agility” and they expect “fewer and smaller participants in the quant space”. Translation: they’ll use a bit less leverage, try to get out of crowded trades faster, and they have deep enough pockets to pursue a strategy that other players no longer have the funds or nerve to continue. Who knows, maybe it might even work out for them in the long run.

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