Goldman Sachs: Not Just a Hedge Fund
Goldman Sachs ( GS) saw investors pull $3 billion in cash from quantitative hedge funds that have been shaky in an unpredictable market. Half of Goldman's hedge fund redemptions came from its flagship fund, Global Alpha, according to Goldman CFO David Viniar, speaking during a fourth-quarter earnings call. Ringing in at about $10 billion in assets, Global Alpha and other quant funds, which use trading strategies centered around computer models that identify arbitrage opportunities, have been whacked due to erratic spread widening.
Global Alpha saw declines of 6% in its fund during the month of November -- a month described by investors as even worse than August, when a crisis of confidence created froze up market activity. Global Alpha saw a total decline for the year of 37%, according to Bloomberg, citing investors in the fund. Viniar said that Goldman is happy having those funds shrink so that they could be more nimble in investing. "We are OK with those funds being smaller," he said. "We think the fund had gotten too big," he added. Alpha and Goldman's other quant fund's performance have been a sore spot for what has otherwise been stellar performance at the firm, which
reported fourth-quarter earnings of $3.22 billion, or $7.01 a share, in the latest quarter, on revenue of $10.74 billion. That easily outpaced the expectations of analysts surveyed by Thomson Financial, who were looking for a profit of $6.61 a share and a top line of $10.16 billion.
Market reaction to Goldman's star performance, however, was surprisingly negative, with investors trading down shares of the New York investment bank to nearly 5%, below $200. Other bank stocks also were down in Tuesday trading. Similar to Lehman Brothers ( LEH), Goldman faced the worst November in fixed income trading the market has seen in more than 20 years, according to traders. CNBC reported on Tuesday that Goldman might have experienced historically poor performance in its fixed-income business. A spokeswman for Goldman did not immediately returned a call for comment.
Credit widening in November meant that the price of hedging instruments, such as so-called credit default swaps used to insure against loss in a security, became more expensive while the underlying securities prices dropped, causing basic arbitrage trades that look to maximize on those differences to go haywire. Goldman saw principal investments drop 26% to $1.03 billion. Trading and principal investments still rose 4% from a year earlier, but fell 16% from the third quarter to $6.93 billion. Lehman's capital markets business dropped 10% to $2.7 billion in the quarter, and fixed-income revenue plunged 60% to $860 million. All the troubles in its quant hedge funds and fixed income didn't prevent Goldman from leveraging from its other business lines and posting solid returns in other areas, including equity trading. The firm is also planning to raise additional cash for a $10 billion hedge fund, known as Goldman Sachs Investment Partners, set to open Jan. 1., according to reports. While Goldman is happy to scale back in its other funds, this planned hedge fund could debut as the largest in history, notes Bloomberg.