Nov. 19 -- 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.''
Christopher Williams, a Goldman spokesman, declined to comment.
Global Alpha fell 22.5 percent in August, hurt by wrong-way stock and currency bets. Other Goldman quant funds lost money that month, including the $7.5 billion Global Equity Opportunities, which declined 23 percent.
Goldman pumped $2 billion of its own money into Global Equity in the middle of the month and raised an additional $1 billion from investors such as billionaires Eli Broad and Maurice ``Hank'' Greenberg, former chairman of American International Group Inc.
August Losses
Bear Stearns Cos., in contrast, allowed two credit hedge funds to go into bankruptcy after losses on mortgage-backed securities.
Quant-fund managers including Highbridge Capital Management LLC, a unit of New York-based JPMorgan Chase & Co., and AQR Capital Management LLC of Greenwich, Connecticut, also lost money in August, when their computer-trading models were jarred by a surge in borrowing costs and stock-market volatility increased 21 percent in the first 16 days of the month.
Goldman is expanding its asset-management division, including three new hedge funds to invest in securities including stocks and distressed credit, Goldman Chief Executive Officer Lloyd Blankfein said at a Nov. 13 conference in New York.
`More Nimble'
Assets in Goldman's quant funds account for about 5 percent of the $151 billion managed by its alternative-investment division as of Aug. 31, Blankfein said at the conference, which was hosted by Merrill Lynch & Co. Asset management is one of two business lines at Goldman Sachs where revenue declined this year, hurt by quant losses. The other was equity underwriting.
Goldman's asset management revenue fell 1 percent in the first nine months of fiscal 2007 to $3.33 billion from $3.36 billion a year earlier. The unit accounted for 9.4 percent of revenue. Analysts estimate the company will report record 2007 earnings.
``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.
Global Alpha's decline through Nov. 14 compared with the 5.4 percent gain of the Standard & Poor's 500 Index, including dividends. Hedge funds globally returned an average of 12 percent through October as the S&P 500 advanced 10.8 percent, according to Chicago-based Hedge Fund Research Inc.
Borrowing Less
Carhart and Iwanowski, both 41, told clients of the fund in a Sept. 18 letter that they were ``actively working'' to make investment changes more quickly and rein in the amount of borrowed money they use in trading. The fund, which at the time of the letter had about $6 billion in assets, may produce lower returns as a result of decreased leverage, they said.
Global Alpha lost about 9 percent in 2006. At the same time, hedge funds globally gained an average of 13 percent, according to Hedge Fund Research Inc.
Hedge funds are largely unregulated investment pools that can bet on falling as well as rising asset prices and whose managers gain substantially from profits on money invested. Industry assets top $1.8 trillion, according to Hedge Fund Research.
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