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Goldman Funds Take Big Hit

Shares rise as the firm sets plans to invest in a struggling fund.
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Updated from 8:05 a.m.

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

shares rose 2% early Monday after the firm said it and outside investors would inject $3 billion into a struggling quantitative fund.

Goldman acknowledged "disappointing performance" at its quantitative funds and said investors including Goldman, billionaire investor Eli Broad and former

AIG

(AIG) - Get American International Group, Inc. Report

chief Hank Greenberg are investing $3 billion in Goldman's Global Equity Opportunities fund.

The firm told investors on a conference call that it would supply about $2 billion of those funds. It said the plan didn't amount to a rescue and added that it is making substantial progress in deleveraging its funds.

Global Equity, an equity long/short quantitative strategy fund, has "suffered significantly" during the market's recent surge in volatility, Goldman said. Quantitative funds use computer models to generate trading strategies.

Bloomberg

reported earlier Monday that the fund had $5 billion in assets and was down 14% in the year ended July 31.

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But Goldman said Monday that the fund's net asset value before the $3 billion investment was just $3.6 billion.

"Given the market dislocation, the performance of GEO has suffered significantly," Goldman said. "Our response has been to reduce risk and leverage."

Goldman said existing investors in the fund will have a chance to invest alongside the firm. Other investors joining in the infusion are Perry Capital and CV Starr, the insurance company led by former AIG chief Greenberg, Goldman said.

"Many funds employing quantitative strategies are currently under pressure as recent conditions have resulted in significant market dislocation," Goldman said. "Across most sectors, there has been an increase in overlapping trades, a surge in volatility and an increase in correlations. 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.

"Goldman Sachs Asset Management also manages Global Alpha, a multi-strategy hedge fund and the North American Equity Opportunities Fund (NAEO), an equity long/short quantitative strategy," Goldman added. "The market dislocation impacting equity quantitative strategies has adversely affected NAEO's performance and has been a key contributor to Global Alpha's disappointing performance. We have reduced risk and leverage in these funds as well. At their current levels of equity capital, we believe the funds are positioned to actively pursue market opportunities."

The news comes as Wall Street has been hammered by hedge fund losses tied to the collapse of the subprime mortgage securities market. Shares of Goldman and rivals such as

Lehman Brothers

(LEH)

and

Bear Stearns

(BSC)

have dropped sharply this summer amid increasing unrest in the stock and bond markets.

Shares rose $4.51 early Monday to $185.01