September 15, 2011 / 4:46 PM / 6 years ago

Goldman's Global Alpha fund hurts investors again

* Goldman’s Global Alpha fund down 12 pct year-to-date

* Many other quant funds performing well

* Global Alpha has performed poorly before

By Lauren Tara LaCapra and Svea Herbst-Bayliss

NEW YORK, Sept 15 (Reuters) - Goldman Sachs Group Inc’s (GS.N) shakeup of management at one of its highest-profile hedge funds comes as the fund’s performance is badly lagging its competitors.

The Goldman Sachs Global Alpha fund, which relies on computer-driven strategies, was down 12 percent through August, according to two people familiar with the returns. The average quant fund is down less than 1 percent over that period, according to performance tracking service Hedge Fund Research Inc.

This is the second time in four years that the Global Alpha fund has suffered big losses and its performance raises questions about the ability of Goldman Sachs to manage quantitative strategies for its wealthy clients.

The shakeup comes almost four years to the day that Goldman’s Global Alpha fund lost 22.5 percent, during the early days of the financial crisis. Those losses prompted investors to pull money from the fund, which had managed $12 billion at its peak.

Since then assets have tumbled dramatically. A Sept. 13 regulatory filing reports that Global Alpha has raised $2.5 billion from clients for its onshore U.S. fund since its inception.

Goldman Sachs declined to comment.

Goldman Sachs Asset Management on Wednesday sent a letter to Global Alpha investors notifying them that Katinka Domotorffy, the head of the group’s quantitative investment strategies, would retire at year’s end. The letter, a copy of which was obtained by Reuters, did not discuss the poor performance of the Global Alpha fund. [ID:nS1E78D28Q]

A person familiar with Goldman Sachs’ quantitative group, which has roughly $56 billion in assets, said the Global Alpha fund now has about $1.7 billion in assets.

Quant funds like Global Alpha use computer-driven trading models to quickly take advantage of opportunities in the market and are supposed to move quickly out of stocks, bonds and other assets and exit positions before losses accrue. In theory, they are never supposed to lose money.

DEJA VU AGAIN

    Of course, it doesn’t always work out that way. In August 2007, when Global Alpha lost 22.5 percent in a matter of weeks, it was not the only quant fund to melt down. In fact, August 2007 became notorious as the summer when the math geeks on Wall Street got it wrong and some of the biggest names in quant trading suffered bad losses.

    But what makes this year’s poor performance at Goldman’s fund stand out is that most quant funds are generating positive returns or are off only slightly.

    On Wednesday, Reuters reported that some quantitative funds have done particularly well amid recent market volatility. James Simons’ Renaissance Technologies’ Renaissance Institutional Equities fund has gained more than 25 percent this year, said a person familiar with the fund run by the math professor turned hedge fund manager.

    Another quant fund, QuantZ Capital Management, for instance, is up 12.8 percent through Sept. 6, according to a letter sent to investors.

    Andrew Schneider, president and CEO of Global Hedge Fund Advisors, said the first half of September has been brutal for some large hedge funds, due to unpredictable moves in market direction.

    “The volatility has been so high; if you’re wrong, especially if you’re using margin or leverage, your returns are going to be extremely poor,” said Schneider.

    Hedge funds that underperform peers are likely to receive redemption requests from preferred investors who are offered liquidity on a more frequent basis than others in return for their investments, Schneider said. (Reporting by Svea Herbst-Bayliss, Lauren Tara LaCapra and Katya Wachtel in New York; editing by Matthew Goldstein and Matthew Lewis)

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