The Goldman Sachs Brand Demystified

By Sarah Wood

What is the Goldman Sachs mystique all about? Consider former Goldman partner Eric Mindich, whose launch of Eton Park Capital Management quickly raised a record $3.5 billion in 2004. Mindich, who became a Goldman partner at the age of 27, had acquired a reputation as a brilliant risk taker while head of the firm’s risk-arbitrage desk before quickly moving up the corporate ladder. Of course, the legendary success of the prop desk and hedge funds run by other alums had already made the Goldman brand pure gold.

But if any investors clamoring to get into Mindich’s hedge fund expected him to deliver the gunslinger-type returns Goldman’s prop desk is known for, his results might have confused them. So far, Eton Park has had a strong—but not breathtaking—annualized performance of 12%. Mindich posted a 40% gain in 2007, winning the Absolute Return award for risk-adjusted performance for a multistrategy fund. In 2008, Mindich’s losses of 8.9%—far less than those suffered by most—boosted his reputation in another way among investors, who cited his institutional caution as a plus. In 2009, however, the money manager remained so bearish he made only 6% through October.

Mindich has always emphasized risk management. But it’s probably a myth that shooting the lights out is the core of the success of many of the former Goldman prop traders. In fact, the Goldman mystique is in many ways just that—a mystique. Goldman prop-trading alums run dozens of hedge funds, accounting for two of the top 10 U.S. hedge funds and seven of the top 50 U.S. hedge funds. (Several more Goldman alums run funds bigger than $1 billion.) All told, they manage more than $150 billion, making them one of the two largest hedge fund clans in the world. (The other is Julian Robertson’s Tiger family.)

Yet far from forming a cabal that controls the markets or has one special recipe for success, the managers have strategies, returns and business practices that are all over the map. When they have worked together, the investments have sometimes soured. And their famed access to deals led them into some poor ones in 2008, particularly in privates that still are underwater, dragging down performance in the onshore vehicles where they reside. Notably, most of the managers shared Wall Street and Goldman’s bullish view of the financial markets, which cost them big.

Now some investors see institutional business building as being at least as important as investment prowess in differentiating the best of the Goldman brand. “Goldman has a culture of rewarding people who are good managers as opposed to just good salesmen or good traders,” says Jonathan Kolatch, who started the firm’s special situation group, the credit desk where a number of hedge fund stars got their start, and launched his $2.6 billion Redwood Capital Management in 2000. “Most have experience running businesses and managing people,” he says of his ex-Goldman hedge fund peers.

Many of the Goldman boys (and, yes, they are all men) foster a particularly Goldmanesque partnership culture, often using a single profit-and-loss statement. That can promote teamwork on investments and reinforce attention to risk management. Importantly, the single P&L makes it easier to shift capital to more profitable assets and regions as opportunities arise.

If that’s the positive side of coming from Goldman, arrogance can be the downside, say investors. Like their former employer, some of the most famous former Goldman fund managers are not particularly known for having investor-friendly policies. As a group, their worst marks in AR’s 2009 Hedge Fund Report Card were for transparency. And some have long lockups that irritated investors in 2008. At the same time, lesser-known ones are making a name for themselves by offering terms more palatable to investors.

Whatever the group’s differences, 2008 was a trying time for the Goldman Sachs hedge fund brand. Most of the spinouts from Goldman’s prop trading operations lost money that year—for the first time in their histories. Some, like Taconic Capital Advisors and Empyrean Capital Partners, as well as Eton Park, lost less than others in their strategies, as measured by the indices. But some of the biggest stars—like Farallon Capital Management, TPG-Axon Capital Management, Fortress Investment Group, ESL Investments, Silver Point Capital and Appaloosa Management—lost more than 25% in their offshore funds, more than the average in their respective strategies. (Unless otherwise indicated, performances cited are offshore.) Meanwhile, the godfather of many in the group, former U.S. Treasury Secretary Robert Rubin, left Citigroup in January 2009 amid accusations that he’d pushed the bank to take on too much risk.

If the funds had once enjoyed an aura of invincibility, it faded in 2008. Their connection to Goldman also lost some of its allure, as the firm’s prestige suffered when it became a bank holding company to receive government aid. At the same time, some of Goldman’s internal hedge funds were hemorrhaging, including its first hedge fund run by a former prop team, Goldman Sachs Investment Partners, led by Raanan Agus and Ken Eberts. GSIP, as it is called, was the biggest hedge fund launch ever when it debuted in 2008 with $7 billion. The launch occurred shortly after the firm’s highly regarded quant funds almost blew up.

Goldman has also become a less desirable connection as the firm continues to fight a public relations war over accusations that it received preferential treatment from a government laden with Goldman alums like former Treasury Secretary Henry Paulson Jr. (Following Goldman tradition, the managers are also active politically. Mindich and Taconic cofounder Frank Brosens stand out as top financial backers of President Barack Obama. Farallon’s Tom Steyer and Perry Capital’s Richard Perry supported Hillary Clinton— Democrats all.)

But both Goldman and its proteges are back. After returning its bailout money, Goldman is again producing sky-high profits. Its two most high-profile hedge funds, GSIP and Global Alpha, are both trouncing the indices, with GSIP netting 29.3% and Global Alpha (onshore) up 22.3% through October. Likewise, most of the funds run by former Goldman prop traders have surpassed other hedge funds in the same strategies—as well as in their high-water marks—and a few, like Appaloosa and Redwood, are miles ahead.

Who qualifies to be among the elite group that are part of the Goldman brand? If one examined any firm ever launched by anyone who ever drew a paycheck at 85 Broad Street or any of its many outposts, it would encompass many denizens of the hedge fund universe, including such diverse managers as former Goldman stock picker Steve Mandel of Lone Pine and former Goldman mergers and acquisitions banker Josh Friedman of Canyon Capital. Defunct Pirate Capital’s Tom Hudson also boasted of having worked at Goldman. Some, like Cliff Asness’ AQR Capital Management, came out of Goldman’s internal hedge fund unit, Goldman Sachs Asset Management.

But the elite consists of the managers who got their start running Goldman’s own money. Principally, these are managers who started out in either the dedicated equities arbitrage area—called risk arbitrage when it was founded by Gus Levy and on through Rubin’s legendary reign, but now called Goldman Sachs Principal Strategies—or the credit arbitrage area, now called the Special Situations Group. A small group of former Goldman macro prop traders have also launched funds, while others got their start trading high-yield bonds, bank debt and other securities for the bank’s customer desks.

They view that training as invaluable. “The guys that run Goldman often come from the risk side, and they understand what a good position is and a bad position,” says Michael Novogratz, a principal at Fortress. “Goldman is one of the only firms that has a whole culture that teaches people those rules.”

One of the greatest strengths of the Goldman pedigree has long been thought to be access to the Goldman network—including fund-raising, idea generation and deals that might not be open to others. The flip side can be excessive correlation. With the Goldman managers, that’s hard to know because many of their holdings are not publicly disclosed. These days, a huge portion of the funds’ assets are credit securities, which do not have the kind of filing requirements that equities do via 13Fs.

That said, the 13Fs of the Goldman funds show remarkably little correlation. Out of the 519 companies in which members of the group invested, just six of the positions were held by four or more funds, according to an analysis of the filings of the 13 largest U.S. former prop traders as of June 30, 2009. Even when puts and calls are included, two or more of the group held securities in the same company in less than 15% of the cases. Och-Ziff’s investments showed the most overlap as the firm was heavily invested in equities in 2009 and runs one of the largest and most diversified books in the group.

Given the risk-arb focus of a handful of the top guys, some of the most frequently shared positions were in such merger targets as Wyeth and Schering-Plough as well as financial stocks JPMorgan Chase and Bank of America. Other overlap positions were Citicorp, Qualcomm and gold exchange-traded funds. However, whether such a thing as a discernible Goldman book actually exists is debatable. These positions were among the top holdings of all hedge funds, not just the Goldman elite, begging the question as to whether the Goldman guys lead the crowd—or follow it. Some credit positions popular in the Goldman network, like CIT debt, are also in vogue throughout the hedge fund universe.

What goes on behind the scenes, on the other hand, has long been industry scuttlebutt. Some managers acknowledge they are friends with Goldman alums at other funds; the old guard of the equities arbitrage desk sometimes get together with Rubin. Rubin is also an adviser to Farallon, and two managers, Mindich and Perry, are involved with Rubin’s think tank, the Hamilton Project. Goldman itself also provides opportunities for them to gather: Many prop traders-turned-hedge fund managers showed up on an attendee list of a dinner for retired partners held in early December at the New York Athletic Club on Central Park South.

The classic collaboration that didn’t go well was the Sears investment of Perry Partners’ Richard Perry and ESL’s Eddie Lampert. Sears contributed to a loss in Perry’s equity book in 2007 and to the firm’s first full-year loss, of 26.8%, for its offshore flagship fund in 2008. The retailer likewise caused a large share of ESL’s 27% loss in 2007 and its 35% decline in 2008. (ESL’s performance is onshore.) Perry and Lampert are friends, but the fund operations they’ve established over the 20 years since they both left Goldman are considerably different—as are the ways that they are pulling themselves out of their recent slumps.

Lampert typically runs a concentrated book, with which, aided by a small team of analysts, he can remain intimately involved. In 2009, he took his $9.7 billion fund down from 17 companies to just eight. Lampert’s trials with Sears, which is still trading below where it was in 2004, when Sears and Kmart agreed to merge and make Lampert Sears’ chairman, have led many to wonder if he is losing his touch. His investors, used to an annualized return of nearly 30% before 2007’s losses, must surely be banking on a Sears turnaround: Lampert’s $4.2 billion position in the company accounted for nearly half the value of ESL’s portfolio, according to the firm’s latest Securities and Exchange Commission filing, for the period ended September 31. Things appeared to be looking up in 2009: Sears’ stock had risen about 75% through December 6, helping to propel a 35% gain in ESL’s hedge fund, RBS Partners, through October.

Perry, on the other hand, runs a huge event-oriented multistrategy shop with a number of portfolio managers and a layer of Goldman-style trainees under them. Following the equity losses, Perry restructured his $7 billion fund in 2008 to focus almost exclusively on credit. The firm slashed its reported equity holdings as of December 31, 2008, to $681 million from $6.6 billion a year earlier; in 2009, its equity holdings gradually crept back up, to just $1.5 billion, as of the end of September. Perry also cut 20% of the firm’s staff, mostly equity professionals. Despite this drastic measure, the fund was up about 20.3% through October, with most of the gains coming from corporate and structured credit.

If public market collaborations like that in Sears soured, the kind of normally lucrative cooperation in private deals that investors have cited in recent years as a particular strength of the Goldman brand proved especially problematic in 2008. Through the network, the thinking goes, Goldman alums get to see and participate in more of these rich deals than they would otherwise.

In 2008, several funds, including TPG-Axon, Fortress and Farallon, lost money in such investments. An example of such investments is the $340 million loan that TPG and Och-Ziff made to finance a Macau theme park and casino development that was reported to be troubled earlier in 2009. In TPG-Axon’s case, private deals cost the firm a single-digit portion of its 33% loss in 2008.

TPG founder Dinakar Singh followed Mindich as cohead of equities arbitrage for the Americas at Goldman and eventually became the cohead of the global prop operation. He launched his multistrategy fund just after Mindich started Eton Park, breaking Mindich’s record with a $5 billion launch— the last such megalaunch out of Goldman.

The firm, which now has $10 billion and like Eton Park has one of the industry’s most stringent lockups, subsequently told investors it had repositioned itself to operate at much lower gross exposures and targeted volatility. It also stopped putting on any new privates at all. TPG was up 18% through October, in part because it got back into stocks that investors abandoned in 2008, like those of Asian companies, cyclicals and financials. But it still has a way to go before reaching its high-water mark.

Also hurt by private holdings was Fortress’s Special Opportunities fund, a hybrid between a hedge fund and a private equity fund run by Pete Briger, a former cohead of Goldman’s Asian distressed-debt business and the Goldman Sachs Special Opportunties (Asia) Fund, among other roles. Direct originations and structured financings led to a decline of 26.4% in 2008. The firm’s Drawbridge Global Macro, run by Novogratz, a former president of Goldman Sachs Latin America and an Asia fixed-income, currencies and commodities risk chief, was down 21.9%, prompting $3 billion in redemption requests at year-end.

The firm moved to suspend redemptions, but within weeks Fortress reversed itself and said it would pay out nearly three-quarters of them by the end of January and distribute the rest over a year and a half after selling off its less-liquid assets. Many investors were irked that the macro fund had made such illiquid investments, but they are being repaid ahead of schedule.

In 2009, Fortress Special Opportunities rose about 20% through October, and Fortress Global Macro gained 22.2%, mostly in currencies and fixed income. But despite the updrafts, the firm disclosed in its third-quarter earnings report that investors in Drawbridge Special Opportunities have asked to withdraw $1.5 billion of capital. Meanwhile, the firm took in $600 million over the last six months for its more liquid hedge funds, which are run by Novogratz. “The business feels really good right now,” he says.

Silver Point, the $6 billion, hands-on distressed fund founded by Ed Mule, a former chief of Goldman’s special situations group, and Bob O’Shea, a former head of global high-yield debt, had in recent years been very active in private direct lending but in 2007 began scaling back substantially. For the past two years it has been selling off its holdings. Like some other distressed players, Silver Point refocused on the public markets, but that didn’t stop it from losing about 33.3% in 2008—a number that would have been higher had it not deleveraged during 2008, according to an investor. Still, the amount of assets assigned to its side pocket, while less than its preset 20% limit, rankled some investors.

As credit markets have rallied in 2009, Silver Point gained about 37% through October. The firm has positioned itself to benefit from the coming distressed cycle, particularly because of its major involvement in such profitable bankruptcies as those of CIT, Delphi Automotive and Six Flags Theme Parks.

“What’s impressive is the depth and breadth in the restructuring work they do,” says Barry Uphoff, a partner with Capricorn Investment Group. “They marry a high level of legal expertise with detailed financial and credit analysis and overall industry acumen.”

None of the first-generation Goldman alums for whom fund performance could be obtained had gains in both 2008 and 2009 in their flagship vehicles—a feat that was achieved by such non-Goldman rock stars as Stan Druckenmiller and his Duquesne Capital Management and the legendary George Soros. Nor did the Goldman hedge funds produce the huge returns betting against subprime that Paulson & Co.'s John Paulson, a former Bear Stearns banker, did.

Moreover, in many cases it’s the lower-profile Goldman alum funds that have done the best in these trying times, especially those known for offering more investor-friendly terms than ex-Goldman stars—as well as for fostering a partnership culture.

One such fund is $6.7 billion event-multistrategy firm Taconic, founded by Ken Brody and Frank Brosens. Brosens is a former Goldman partner who followed Rubin as head of equities arbitrage and who hired and trained such successors as Mindich, Singh and Amos Meron of Empyrean. Brody was a general partner at Goldman and a member of the management committee who headed several different areas over time.

An investor favorite at the moment, Taconic is run with unusual attention to fostering a partnership culture—both within the firm and with its limited partners. For starters, compensation is tied to firm performance as a whole with a single P&L, an arrangement that many Goldman alums say helps employees think of the capital they are running as their own, which boosts teamwork, creativity and good risk management. The firm also requires equity to be left behind by departing employees, of whom there have been few.

“Make it clear that when the founders leave, their equity share will get redistributed among the remaining partners,” Brosens counseled as part of a keynote address he gave at Absolute Return’s 2005 symposium. “And while that precludes the sale of the firm, the IPO of the firm, or any other way to monetize the assets, it sends a very loud message to the senior professionals there that they will always be treated equally.”

Of course such policies don’t prevent losses. Like many in the Goldman fraternity and throughout the broader hedge fund industry, Taconic was hit hard in the summer of 2008 by declines in commodities and senior debt. By year-end, the firm was down 12%. That was lower than many funds, and the firm won points with investors by selling off positions to meet redemptions rather than suspending or putting up a gate, as some other Goldman alums did.

In 2009, Taconic and its investors benefited from another plan the firm had put in place years ago in the event that it ever fell below its high-water mark: a reserve fund. The fund enabled Taconic to keep all parties’ interests aligned, avoid layoffs, pay the partners and rack up an 18.2% gain, bringing its investors up past their high-water marks. The firm’s efforts did not go unnoticed: Taconic was voted one of the top five among the largest hedge fund managers when it comes to alignment of interests—and first in transparency—in AR’s first Hedge Fund Report Card.

Empyrean is also emerging from 2008’s wreckage with a bit higher profile for its partnership culture. Based in Los Angeles, the now-$800 million firm launched in 2004 in the shadow of Eton Park, but expectations were high, given founder Meron’s past role at Goldman as cohead of the Americas equities arbitrage desk with Singh. The fund’s early gains were modest, as the founders felt the markets were getting ahead of themselves, leading to redemptions from a height of $1.3 billion. But in 2008 the firm held losses down to 11%, mostly in event-related equities, and in 2009 was up 28% through October. It also has moved much of its assets to a multiyear lockup.

Like Taconic and many other Goldman firms, Empyrean emphasizes teamwork, with a single P&L. “We have a 100% single-investment team. Everybody is incentivized to make the pie bigger,” says Meron.

The single profit-and-loss statement used by many of the Goldman funds is no guarantee of success—plenty of funds that use it lost a lot of money in 2008, including Redwood and TPG. But Farallon, which remains the largest of the Goldman alum funds with $18 billion as of July and produced one of 2008’s worst returns, notably employed a much less team-oriented system.

Until its losses forced it to restructure, Farallon employed a mostly eat-what-you-kill pay system and a decentralized, siloed approach to managing the portfolio. After losing 36% in 2008, the firm experienced heavy redemption requests and suspended them after they had exceeded the firm’s 25% fund-level gate. That triggered the creation of a liquidation trust to handle the gradual sale of redeeming investors’ interests in the fund.

Farallon has since told investors that it is centralizing the investment process more through founder Steyer, who worked as a researcher on Rubin’s equities arbitrage desk, and co-head Andrew Spokes. Spokes was recently named a key man along with Steyer in fund documents, adding to rumors that Steyer was angling for a position in the Obama Treasury department. After Farallon repositioned its portfolio, the fund was up 28.2% through October. And despite suspending redemptions, the firm appeased investors by returning cash quickly, not charging fees on the suspended assets and being transparent about the process.

Investors used to criticize Goldman alums for being too focused on business management and empire building. But these days, business acumen is much more desirable. “Compared to almost any other hedge fund, out of the box, the Goldman alums have historically never done anything on a shoestring—others will start with nine employees and they’ll start with 30,” says Bruce Ruehl, chairman of Gleacher Fund Advisors, referring mostly to non-investment infrastructure personnel."You walk in and even on the first day it’s like they’ve been operating for five years.”

Eton Park is one of the best examples of business-building in the group, having launched with nearly 50 employees and several high-powered partners who had worked with Mindich at Goldman, including Erland Karlsson and Edward Misrahi. The firm also quickly established businesses around the world. Following the 2008 crisis, Mindich said that strong structures had become all the more more important. “The controls and the infrastructure really have to be top rate,” Mindich said in a keynote address at Absolute Return’s 2008 Symposium. “I think investors to varying degrees value that. People saw in 2008 how important that was in every way.”

“Mindich’s business-building has been really striking to me,” says Eric Dillon, the chief investment officer at Silver Creek Capital Management. “He’s been able to build a highly functioning business operation while always staying close to the investment portfolio.”

Some of the group’s biggest institution-builders have done so only over time. TPG had no chief operating officer until 2008, when it brought on as operating partner David Weil, a former Goldman partner who had served as chief operating officer of the investment division and treasurer of the entire firm, among other roles.

Dan Och spent 15 years building his more-than $20 billion business. Och launched his fund in 1994, several years before investors began rolling the dice on billion-dollar launches by lining up a backer in the Ziff publishing family. He began trading with just $100 million. By eschewing the gunslinger mystique, he has been able to compound assets—and attract new investors—with an almost indexed investment approach of limiting positions to less than 2% of the portfolio and keeping risk under strict control. The firm has risen to become one of the 10 largest hedge fund operations in the U.S. In 2007, it became the first pure-play hedge fund firm to go public.

A year ago Och-Ziff was preparing to report a 15.9% loss in its flagship OZ Master Fund (Och’s figures are blended offshore/onshore), and investors asked to redeem what would total a net outflow of $5.2 billion by March 1. In 2009, however, that fund netted 21.3% for the year through October, putting it on track to produce its best annual returns and to get most of its investors above their high-water marks. In October, the turnaround was apparent: It had net inflows of $200 million.

“We remain confident that, as investors redeploy capital to alternative asset managers, we will be a leading beneficiary of those flows because of our track record, infrastructure, transparency, and the consistency of our model,” Dan Och said in a conference call with analysts after reporting its third-quarter earnings. Additionally, the firm is in talks with some institutions interested in longer-term lockups in return for fee breaks. The firm did not change any of its liquidity policies in 2008.

If Och is an example of the more conservative Goldman alum, former Goldman high-yield trader David Tepper at Appaloosa is just the opposite. Tepper’s goal is always outperformance, and he sometimes takes a wild ride to get there. Tepper has a very high tolerance for volatility, and for investors who can join him, the rewards can be terrific. Tepper lost about 26% in 2008, mostly in the first half, by going “long and wrong” as he told AR.

But in 2009, he made more money than any other major hedge fund, gaining about 113.6% through October. Tepper did this by buying credits in the midst of the 2008 crisis and by timing his return to the equity markets almost perfectly, especially when it came to such names as Bank of America, which has been one of Appaloosa’s best performers. The fund has an annualized return of about 28%.

Tepper’s success points to the fact that the lesser-known former credit managers deserve as much, if not more, attention than what Goldman’s giant former equity arbitrageurs attract. “They all have a very, very above-average feel for the markets,” says one investor, referring in particular to Tepper, his credit colleagues and those who came later. “They’re very unemotional and have the courage to take aggressive bets even in the face of disappointing losses.”

This was especially true in 2008 for Kolatch’s Redwood Capital, which is long-biased and focuses on the top and middle layers of capital structure. Although the fund was facing steep losses that would total 32.7% by the end of 2008, Kolatch had the perspective to see opportunity and made big money by selling securities that were down 10 points to buy others that were down 50. Afterwards, the firm decided to build up a bigger cash reserve to take advantage of such opportunities. This year, Redwood has profited from investments in the credit of such companies as AIG and CIT and the bank preferreds of names like Bank of America. By the end of October, the firm’s flagship Redwood Capital Master Fund had jumped 69.1%.

“The thing I like about our business is I like to buy things on sale,” Kolatch says.

Like Tepper, Kolatch was one of the first employees in Goldman’s high-yield bond business. Kolatch started Goldman’s high-yield research effort in 1985 and, after switching to sales for a year, started a dedicated high-yield proprietary book for Goldman in 1987. He went on to become a partner and founded and led the bank’s proprietary credit trading business, until he left the firm in 1999.

Kolatch launched Redwood with just $75 million. Now, after laboring in the shadows of funds run by much more high-profile Goldman alums, Redwood is an investor favorite and is attracting new interest.

“It’s not really the network; it’s the research they do,” says Jim Berens, a managing director with fund-of-funds operator Pacific Alternative Asset Management, referring to the Goldman credit alums. “They work their butts off.”

Christian Leone’s low-profile, opportunistic, event-oriented credit firm, Luxor Capital Group, is also in this category. The onshore version of the firm’s flagship fund, which was up 27% by the end of October, after falling 20% in 2008, boasts a 23% eight-year annualized return. Before launching $1.9 billion Luxor, Leone worked as part of a credit team managed by Silver Point’s Mule and O’Shea, as well as Redwood’s Kolatch and Larry Buchalter, president of Luxor.

Luxor focuses on doing its own bottom-up, security-level research, and this year has profited by taking advantage of the significant moves in corporate credit, bank loans, distressed debt, high yield and convertibles.

Leone says he was heavily influenced by his experience at Goldman. “The entrepreneurial culture where everyone was consistently encouraged to explore new and different ways to profit along with the willingness to move across asset classes and geographies when appropriate shaped the way Luxor has approached the market for the last eight years,” he says.

Another less well-known credit fund in the group with a fantastic year in 2009 is Goldman special situations veteran Joseph “Jody” LaNasa’s Serengeti Asset Management. In 2008, the $650 million firm’s flagship Serengeti Overseas fell 52.1%, principally because of some bad bets on bank debt and some short equity positions.

But LaNasa is among the first to a trade, according to an investor, and even in 2008, the firm’s Serengeti Rapax, a financials fund, gained 10.5%. In 2009, Rapax was up 29.8% through October. The flagship started the year with a 9% gain in January and had increased by 73.3% by the end of October, largely as a result of a bounceback in bank debt, as well as some liquidation plays and equity investments.

So what is the future of the Goldman pedigree?

At a time when most banks have rolled up the carpet on risk—and with that their prop desks—no one expects Goldman to do the same, so the firm is sure to continue to groom new prop traders. But if it seems like it’s been a while since there has been a big launch out of Goldman, that’s because it has been. In large part, this could be because it is a much more difficult environment for megalaunches, and Goldman alums do tend to aspire to creating big businesses. Would-be launches also have some tough acts to follow.

The dearth of Goldman launches may also have something to do with Goldman’s move two years ago to halve its proprietary effort, giving the existing leaders, Agus and Eberts, their own hedge fund within GSAM as well as about $2 billion of Goldman capital, and promoting rising stars to take over the prop effort.

The Goldman alums have also not produced a lot of superstars themselves. Perry alum Chris Hohn is perhaps the best known, but his Children’s Investment Fund suffered setbacks with the downturn in activist investing.

Investors are mixed about whether the Goldman group treated them better or worse than the average hedge fund during the financial crisis, but most of the funds did not change their terms during that period, and as Och points out, they will likely benefit from that. Finally, the continued increase of institutions as a share of the hedge fund investment pie should help the Goldman alums, as the institutions favor the kind of deep infrastructures they tend to provide.

And what about Eton Park? Has the Goldman mystique worn off? Some investors were frustrated that Mindich did not participate more in 2009’s rally; many others give him credit for sticking to his guns and remaining cautious when he was so worried about the state of the world economy.

“Eric is the master portfolio hedging guy—exceptional at managing tail risk events as in 2008,” says Capricorn’s Uphoff. “In hedge funds, we expect the word hedging means they will protect the downside.”

Investors’ main gripe centers on the fund’s illiquidity. Eton Park’s effective five-year lockup led the firm to score dead last on liquidity in the AR Report Card (and an overall ranking of 16 out of 31), and one fund-of-funds investor says he expected higher gains in return.

Eton Park has said that it set up its liquidity structure with the ability to take long-term bets in mind, as well as to make the fund structure more stable for its investors. Investors have also voted with their dollars, nearly tripling the firm’s assets over its five years and only requesting modest redemptions in 2009.

There is also something to be said for the fact that Eton Park and the other Goldman megalaunches of the period, such as TPG, were able to survive at all given that they started with so much money. Of the eight funds that started business in 2004 with more than $1 billion under management, half—DB Zwirn Capital, Ospraie Management, Sowood Capital and Saranac Capital—have shut down their flagship funds or gone out of business entirely.

Meanwhile, the 12% annualized return Eton Park has produced is in line with some of the biggest names in the clan, such as Perry and its 12.4% long-term gain, and just behind Och, with a 14.5% annualized return. Like their former employer, the Goldman hedge fund elite have staying power. AR

THE FALLEN FEW

Remarkably few of the Goldman Sachs alums running hedge funds have blown up, but few is not zero.

The most resounding failure was the crash of Peloton Partners, the $3 billion firm founded by Ron Beller and Geoff Grant. Based in London and Santa Barbara, Calif., the fund had been flying high following its subprime short in 2007, only to shut down after huge losses in long positions held by its London mortgage group in early 2008. Its 11-member Santa Barbara macro team, which is led by Grant and was uninvolved in Peloton’s mortgage trading, reconstituted itself as Grant Capital Partners in September 2008. It runs about $200 million and has produced positive returns since inception.

More recently, Davide Erro’s $3.8 billion Gandhara Advisors announced it would close after suffering losses in 2008, although it lost only about 19%, an amount most funds can pull through if they chose to do so. The fund had been based in London and Hong Kong, and Erro is planning to open another soon.

Others, like Ralph Rosenberg’s R6, which launched in 2006, after the market for big megalaunches began to sour, just never gained traction. A former chief of special situations as well as the Goldman real estate principal investing business, Rosenberg in 2007 merged his fund into Eric Mindich’s Eton Park Capital Management.

One small second-generation fund that closed after losses was Perry Partners spin-off Jonathan Bailey and Stephen Coates’ Bailey Coates Asset Management of London. But contrary to rumors, One East, founded by Perry Capital veteran Nat Klipper and Sandell Asset Management alum James Cacioppo, remains open following the recent departure of Klipper and had returned about 33% through the end of October 2009. Still, after losing roughly 30% in 2008, the fund is now running just $400 million, down from a peak of $2.2 billion. Since Klipper has left, it is no longer a Goldman scion.

Among Goldman Sachs Asset Management alums, one who went on to perpetrate hedge fund fraud was Michael Smirlock. Following his 1993 dismissal from GSAM for fraudulently shifting assets to boost the returns of the firm’s fixed-income unit, of which he was the chief investment officer, Smirlock set up his own hedge fund shop, Laser Advisers, in Short Hills, N.J. He again attempted to fraudulently inflate his performance and was sentenced to four years in prison in 2002. Sarah Wood

PERFORMANCE OF GOLDMAN SACHS PROPRIETORY TRADING ALUMS

Performance is generally offshore except where specified.

Source: AR research

*As of November **Domestic ***Blended offshore/onshore