U.S. News

Goldman Invests $3 Billion in Troubled Fund, Won't Unwind Others


Goldman Sachssaid Monday it doesn't plan to unwind two hedge funds - its Global Alpha and North American Equity Opportunities funds - following losses the funds have suffered amid recent market volatility.

On Monday, Goldman provided a third fund, the Global Equity Opportunities Fund, an injection of $3 billion in new investments. The value of that fund had fallen nearly 30% in the year-to-date period, with most of the losses occurring in the past few days.

Faber Report: Another Goldman Move

New funding for the GEO fund came from Goldman, C.V. Starr, Perry Capital and Eli Broad. Goldman itself contributed $2 billion of the funding.

Goldman also reduced the risk and leverage for all three of these funds, which employ various quantitative strategies.

The GEO fund had a nearly $3.6 billion net asset value before equity investment.

"We consider this an attractive investment opportunity," Goldman said in a statement. "Existing investors in the fund will also have the opportunity to participate. The investment will also provide the fund with more flexibility to take advantage of the opportunities we believe exist in current market conditions."

Many funds that employ a quantitative strategy have been hurt by recent market volatility. Such funds rely on computer models to make their bets. The situation began on Aug. 3, when stocks started moving not only in ways that commonly used models didn't predict, but in precisely the opposite direction from what was expected. The market also was far more volatile than models predicted by on years of modeling.

"Across most sectors, there has been an increase in overlapping trades, a surge in volatility and an increase in correlations," Goldman said. "These factors have combined to challenge many of the trading algorithms used in quantitative strategies. We believe the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals."

The value of Goldman's Global Alpha fund has fallen 27% in the year-to-date period, with half of the decline occurring in the past week.

North American Equity Opportunities, which started the year with about $767 million in assets, was down more than 15 percent through July 27.

Goldman Sachs said risk-taking and leverage in these two funds also have been reduced. Roughly 75 percent of the scaling down has already been completed at the two funds. Global Equity's leverage ratio has been reduced to 3.5 times equity from 6 times.

Goldman, one of the world's premiere financial companies, joins Bear Stearns and France's BNP Paribas in revealing that its hedge funds have been slammed by the credit market crisis. There is some $2 trillion believed to be held in hedge funds globally.

Bear Stearns earlier this summer disclosed that two of its multibillion-dollar hedge funds were wiped out because of heavy bets on mortgage-backed securities. BNP Paribas said last week that it would freeze three funds invested in U.S. asset-backed securities.

Britain's Barclays may be among the banks that is having troubles. Barclays Global investors is one of the world's biggest fund managers, with some $2 trillion in assets under management.

"This is a black eye for a company that has such a strong track record for delivering good returns for investors," Deutsche Bank analyst Mike Mayo said in a research note.

On the other hand, he said "this is yet another example of Goldman looking to capitalize on market dislocations."

The move, along with Goldman's bullish comments on stocks, sent the bank's shares up nearly 1 percent to $182.22 in midday trade and sparked a rebound in the broader U.S. stock market. Goldman is down 22 percent from its 52-week high in May.

Not A Rescue

During a conference call Goldman held Monday morning, Goldman Chief Financial Officer David Viniar insisted the Global Equity cash infusion was not a bailout, but was rather a move giving the fund new cash needed to buy stocks where valuations are "way out of whack."

"This is not a rescue. Given the dislocation, we saw a good investment opportunity for us and other investors," he said.

The recent struggles represent an embarrassing setback for Goldman Sachs Asset Management, which until recently compiled a strong track record managing hedge funds. Fund performance fees have lagged this year due to poor returns in Global Alpha.

Viniar denied the rampant speculation that Goldman was unwinding the Global Alpha and North American Equity Opportunities funds. Viniar said these funds did not require new cash to pursue market opportunities.

Analysts said the infusion is small relative to Goldman's overall size and that the three funds in question, with an aggregate of about $10 billion under management, represent a sliver of the firm's $758 billion of total managed assets.