Size Doesn’t Keep Goldman Fund From Gyrating With Market (Published 2007) (2024)

During the heady days of the market boom, Goldman Sachs, with its billions in hedge funds and private equity investments, came to define that era’s euphoria.

But now, as credit markets have seized up and investors have become more risk averse, the firm’s exposure to volatile fixed-income markets through its trading desk and hedge funds may well make Goldman the latest symbol of overreaching on Wall Street.

Front and center is the continuing malaise in the performance of the firm’s $9 billion Global Alpha hedge fund, by far the largest internal hedge fund operated by a Wall Street firm and, until last year, a geyser of fees and profits for the bank’s asset management unit.

Yesterday, the Dow Jones industrial average plunged 2.8 percent as rumors spread that Global Alpha’s losses were mounting. Down 6 percent last year, the fund had slipped another 16 percent through July, and according to people who have been briefed on its performance, it lost a further 11 percent this month.

Compounding this unease were reports that another Goldman fund, North American Equity Opportunities, with assets of $600 million, had lost 15 percent through July.

Turmoil at Bear Stearns over the last month because of its two collapsed hedge funds has left investors on edge, and the latest problems at Goldman created another wave of selling panic yesterday. Goldman’s stock closed at $182.25, off 5.7 percent.

One reason is scale. The Bear Stearns hedge funds were fairly small in size despite use of leverage by both. The two funds had combined assets of more than $1.5 billion and investors are not expected to recover much, if any, of that. For the much larger Global Alpha to have ended last year down 6 percent after being up 12 percent through the first six months of the year — and then to have added further large reversals this year — means that billions of dollars in clients’ money have vanished.

A second reason is that unlike Bear, Goldman has a very aggressive proprietary trading desk. While the firm has always said that there is a Chinese wall separating the firm’s hedge funds from its traders, it has long been felt on Wall Street that good investment ideas, or bad ones for that matter, are to some degree shared at the firm.

Just recently, for example, Raanan A. Agus, one of the firm’s top proprietary traders, was moved to the firm’s asset management unit, where he will start up an internal hedge fund that could rival Global Alpha in size. That has created another level of worry, stirred by concerns that Global Alpha’s investment miscues might show up on Goldman’s trading desk.

Asked to comment on rumors that the fund might be liquidated, Peter Rose, a spokesman, said that was “categorically untrue.” He declined further comment on Global Alpha.

“Firms like Goldman Sachs have gone out on the risk spectrum, which makes them doubly vulnerable,” said Richard X. Bove, a securities analyst at Punk Ziegel & Company.

Mr. Bove added that it was unlikely that the firm’s traders and hedge fund managers operated in virtual seclusion. “If the investment is perceived as sound, then everybody participates,” he said.

When Global Alpha, a quantitative fund that relies on computer models to drive its investment strategy, soared 40 percent in 2005, it became an apt metaphor for Goldman itself: large, mysterious and immensely profitable. Now, as the fund struggles to raise cash by selling securities that have suddenly become illiquid, it has become a symbol of the toll being taken on this style of investing.

Other funds that employ quantitative strategies have also been hit this month, including a large fund run by James Simons of Renaissance Technologies, who attracted notice last year for his reported $1.5 billion payday. The fund has lost 8 percent in August, according to Mark Silber, a vice president at Renaissance. For the year, the fund is down 7 percent, he said.

AQR, a fund run by Clifford S. Asness, lost 13 percent this month, said a person briefed on its performance record, and Tykhe Capital, a $1.8 billion fund, has lost 19 percent, an investor said. Another computer-driven fund, at Highbridge Capital, is down 5.2 percent this year, according to a person briefed on its results.

Goldman, with its $36 billion in equity, its diversified businesses and its access to cheap financing, is in a better position than many of its peers to weather the worst of market squalls. From its chief financial officer, David A. Viniar, to the chief executive, Lloyd C. Blankfein, Goldman executives have made it clear that they do not believe the flush times of recent years can continue.

Mr. Blankfein, in particular, a former commodities trader who gained the top slot at the bank by expanding the firm’s trading operations, has been doing his own version of Chicken Little. In last year’s annual report, he wrote that “in absolute terms we plan for the worst.” And his common refrain since he took over as chief executive has been, “the only thing we know is that everything will happen.”