In striking testimony to Goldman, Sachs & Co.’s marketing might and the mystique of its traders, Goldman Sachs Asset Management has raised roughly $7 billion for Goldman Sachs Investment Partners, a new long-short equity hedge fund. The offering is the largest hedge fund launch ever, an impressive feat for a firm that suffered some of 2007’s biggest and highest-profile hedge fund losses.
Global Alpha, Goldman’s flagship quantitative hedge fund that began last year with $10 billion under management, continues to bleed assets following a 39 percent loss in 2007. The firm’s mathematical algorithms, which are designed to generate profit by capturing price discrepancies between stocks, stopped working in the equity market fallout from the subprime crisis. Goldman had to bail out another quant product, its Global Equity Opportunities Fund, with a $2 billion capital infusion in August when the subprime crisis caused big losses for that portfolio — which has since recovered some ground.
This time around, Goldman is relying on star traders from its fabled principal strategies group, which uses the firm’s capital to make investments. Goldman Sachs Investment Partners, which launched January 2, is run by Raanan Agus, the former head of the group, and Kenneth Eberts, the former head of U.S. investments.
“Goldman is undoubtedly the best hedge fund brand out there,” says James Hedges, president and CIO of Naples, Florida–based advisory firm LJH Global Investments. “The bank is known for its trading ability and has a track record in equities that goes back 30 years.”
The standing of the firm’s traders has never been higher, as smart bets on mortgage markets in 2007 made it one of the few banks to profit from the U.S. subprime crisis. At a time when many of its rivals revealed staggering losses, Goldman reported record profits of $11.6 billion in the fiscal year ended November 2007.
The new fund diversifies GSAM’s alternatives business away from the struggling quantitative funds that last year hurt the group, which has $868 billion in assets under management. GSAM’s performance fees fell 81 percent, to $187 million, in 2007, primarily because of losses in its quant funds. Inflows into alternatives dwindled to $9 billion, versus $32 billion for the same period in 2006. Goldman CFO David Viniar revealed that GSAM suffered client losses of about $3 billion in the fourth quarter, with close to half of that coming from Global Alpha. He also warned of more damage to come.
“We think redemptions in the first quarter will be even greater,” Viniar told analysts.
Goldman’s new fund is expected to help make up some of that shortfall. “Goldman’s secret is that it mutates its model when something stops working,” says former Goldman analyst Mark Hurley, CEO of Dallas-based wealth management firm Fiduciary Network. “The firm is very good at taking advantage of market opportunities.”
Goldman Sachs Investment Partners has the benefit of being managed by some of the firm’s brightest stars. Agus, who graduated with a BA in economics from Princeton University and joint law and business graduate degrees from Columbia University, has managed the firm’s principal strategies group since 2003. Eberts, a Stanford University graduate with degrees in quantitative economics and history, took over as head of U.S. investments the same year. Since then the group’s aggressive bets have been an important driver of Goldman’s trading profits.
This is the first time Goldman Sachs has moved its proprietary traders to asset management to manage a hedge fund. But Goldman Sachs alumni have long enjoyed special status in the hedge fund industry.
In November 2004 former Goldman co-head of equities Eric Mindich raised more than $3.5 billion for the launch of his New York–based multistrategy hedge fund firm Eton Park Capital Management — the largest hedge fund launch at the time. Mindich’s firm has since grown to $10 billion and posted returns of roughly 35 percent in 2007, according to industry sources. Similarly, in early 2005, Dinakar Singh, the former co-head of Goldman’s principal strategies group with Agus, raised $2.8 billion for his fund, New York–based TPG-Axon Capital Management. TPG has since grown to $13 billion.
Keeping its star traders in-house looks like a smart move for Goldman, which will earn close to 2 percent management fees on the $7 billion invested in its new hedge fund, regardless of performance, not to mention incentive fees of almost 20 percent if the fund succeeds. But Agus and Eberts will likely have to temper their investment style. One former Goldman employee notes that within the investment bank, traders have a year to make a trade work, but outside investors will be much less tolerant of risk.
