NEW YORK (Reuters) - Goldman Sachs Group Inc. (GS.N) and investors including former American International Group Inc. (AIG.N) Chairman Maurice “Hank” Greenberg will pump $3 billion into a hedge fund that plunged about 30 percent last week, the investment bank said on Monday.
The hedge fund, which had a net asset value of $3.6 billion before the infusion, is the third managed by Goldman that has been hurt by recent market turmoil. Down about 3 percent before last week, the fund has lost more than $2 billion this year.
“This is a sort of preemptive rescue,” said Eric Kuby, chief investment officer for North Star Investment Management Corp. in Chicago. “They are trying to act sooner rather than later.”
“There is a potential for crisis of confidence and these are very smart people,” he said.
But Goldman’s Chief Financial Officer David Viniar denied that the cash infusion into the Global Equity Opportunities fund was a bailout. Rather, it was intended to raise cash to buy stocks in a market where valuations are “way out of whack,” Goldman said.
“This is not a rescue. Given the dislocation, we saw a good investment opportunity for us and other investors,” Viniar said in a rare conference call between quarterly earnings reports.
Goldman is investing $2 billion of its own capital into the fund.
An additional $1 billion will come from such investors as Greenberg’s investment firm and insurance broker, C.V. Starr & Co.; Eli Broad, the billionaire founder of KB Home (KBH.N) and SunAmerica; and Perry Capital LLC, a hedge fund run by Goldman alumnus Richard Perry. Existing investors also can add money.
Global Equity has fallen “in the low 30s” in percentage terms this year, Viniar said, adding that the losses all happened last week.
Goldman shares reversed early gains and fell nearly 1.7 percent on the New York Stock Exchange to close at $177.50, a 10-month low. Goldman shares are down 11 percent so far this year, slightly worse than the 10.3 percent decline in the sectoral KBW Securities Broker Dealer index .XBD over the same period.
“This is a black eye for a company that has such a strong track record for delivering good returns for investors,” Deutsche Bank analyst Mike Mayo said in a research note.
In recent weeks, volatile markets have wreaked havoc on “quantitative” funds, pools of money that use computer programs to identify and execute trades. Stock markets bounced up or down by 1 percent in each of the past 13 days, while credit spreads widened to their largest gap in two years.
Renaissance Institutional Equities Fund, a $26 billion fund managed by James Simons, said last week it is down about 7 percent this year amid selling by other quant funds.
Quant funds exacerbated the problem by selling off otherwise solid stocks all at once, Goldman said. By the end of last week, with the fund’s value falling, Goldman decided to pour money in and convinced outside investors to write checks.
Last week, Goldman shares tumbled amid speculation of major losses at two Goldman-managed funds: the flagship Global Alpha, which uses quant and other investing strategies, and the North American Equity Opportunities fund, a quant fund that makes both long and short bets.
On Monday, Goldman said the value of Global Alpha was down about 27 percent this year, with about one-half of that decline in the past week. As of Monday the fund had about $7.25 billion in assets under management, down from $10 billion at the end of last year, a person briefed on the fund said.
North American Equity Opportunities, a quant fund that started the year with about $767 million in assets, is down “in the high 30s” percent this year to less than $500 million, the source said.
The recent struggles represent an embarrassing setback for Goldman, which until recently had compiled a strong track record managing hedge funds. The poor performance has also translated into lower asset management fees.
Viniar denied market talk that Goldman was unwinding the Alpha and North American funds. He said the funds did not require new cash to pursue opportunities, though executives did not rule out infusions for its other funds.
Still, some analysts raised concerns that Goldman was using its capital to shore up an affiliated fund.
“We are concerned that this action on the part of Goldman is also being taken to protect (Goldman’s) image in the market, pointing up moral hazard risks related to (Goldman) that go beyond what we had assumed in our analysis,” credit analysts at Standard & Poor’s said in a report.
Additional reporting by Herb Lash and Kristina Cooke, editing by John Wallace/Jeffrey Benkoe/Deborah Cohen