Hedge fund gets $3 billion infusion

Broad, Greenberg are among investors in Goldman Sachs' GEO, down about 30%

August 14, 2007|By New York Times News Service.

Goldman Sachs and a group of investors are injecting $3 billion of capital into one of its flailing hedge funds that lost about 30 percent of its value last week.

The bank's decision is an indication of the severity of last week's market movements as well as the potential for significant losses in hedge funds.

The Goldman fund, Global Equity Opportunities, was worth a little less than $5 billion slightly more than a week ago. After the market's roller-coaster ride last week, which affected a wide swath of quantitative or computer-generated trading models, its assets fell to $3.6 billion.

Now, with about $2 billion from Goldman and $1 billion from C.V. Starr & Co., Maurice "Hank" Greenberg, former chairman of American International Group, and Eli Broad, a California real estate developer, the fund will have more than $6 billion.

Goldman's chief financial officer, David Viniar, said yesterday that the investment should not be seen as an attempt by the bank and the investors to bail out the fund, but an effort to take advantage of the unusual conditions in the market.

"This is not a rescue," Viniar said. "Given the dislocation in the markets, we believe this is a good investment opportunity for us and for the other investors that we have brought in." He said it would also help current investors by giving it capital to invest.

Analysts saw it a bit differently.

"It is a rescue in that you are providing capital so this hedge fund doesn't have a liquidity problem," said Brad Hintz, an analyst at Sanford Bernstein. "But on the other hand, in the face of pretty exciting market conditions, they are putting capital at risk which tells me that Goldman Sachs is - what is that famous Wall Street phrase? - cautiously optimistic."

The capital injection is a remarkable event for Goldman, which more than any other bank on Wall Street has aggressively built out its hedge fund strategies. It has done this in two separate parts of the bank: using its own capital on its proprietary trading desk, a strategy it has followed for a long time, and using money from its high-net-worth clients and institutions such as pension funds and endowments to build up its hedge funds within its asset management group.

In the second quarter of 2007, the asset management group earned $1 billion in management fees - fees the bank earns regardless of performance - a significant portion of which came from fees from hedge funds.

Global Equity Opportunities, known as GEO, as well as North American Equity Opportunities and Global Alpha, a multistrategy fund, are all housed within the asset management business, which has $151 billion in assets invested in alternative investment strategies. The infusion into GEO appears to be a first for Goldman.

It comes at a time when the bank's hedge fund strategies are suffering. Global Alpha, often referred to as Goldman's flagship hedge fund, is down 27 percent through the end of last week. The fund now controls $7.2 billion, down from more than $10 billion at its peak.

The fund's investors are able to redeem their money quarterly, and Goldman will know by the end of the week if investors intend to yank money out of the fund because of its continued poor performance. Viniar said that so far this year, more capital had come into the fund than flowed out.

GEO and North American Equity are both pure quantitative strategies, meaning computers are programmed with millions of ministrategies to buy and sell when certain things happen in the marketplace. Global Alpha is a multistrategy fund, but one of its main strategies is quantitative equity long-short, so it has been hit by the same volatility that has affected the other two funds.

Goldman is in the process of starting a significant traditional long-short equity fund, where a person, rather than a computer, decides what to invest in. Insiders at Goldman speculated a few weeks ago that the new fund could raise up to $10 billion. A spokesman declined to comment on such speculation.

The Associated Press contributed to this article.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.