October 15, 2009 / 3:36 PM / 10 years ago

EXCLUSIVE: Ex-Goldman fund star Carhart to launch firm

NEW YORK (Reuters) - Former Goldman Sachs Group Inc (GS.N) star hedge fund manager Mark Carhart, who departed early last year after the Global Alpha fund he co-managed had struggled, told Reuters on Thursday he is starting his own firm and trying to raise $1 billion for a new investment fund.

Carhart, speaking on the sidelines of a conference, said he plans to launch in 2010 and is targeting large institutional investors. Ultimately, he hopes the unnamed firm will manage as much as $5 billion in the computer-driven investment strategies that offer some new twists in a field with thousands of funds.

The goal is to generate “alpha,” the measure of a manager’s skill in beating U.S. stock returns, he said, without following the same ups and downs as the market, or “beta.”

Unlike most funds, Carhart said his new fund will identify opportunities to collect risk premiums, rather than market inefficiencies, with different returns than stocks.

“It’s meant to supplant a large portion of hedge funds which don’t have as much alpha as they do a lot of embedded beta,” Carhart said in the interview. “It is a new category, really: some call alternative beta, but “exotic beta” is the best way to describe it.”

The fund also may offer some other unique features.

Carhart is considering charging fees that reflect risk exposures and single out outperformance attributed to his investing skills. The firm will also pursue strategies clients like because they are easily traded and transparent, he said.

The “beta” portions of the fund, he said, will likely be delivered through separately managed accounts, which lets clients customize and have a clear view of what they own.

GOLDMAN INCUBATOR

Carhart is the latest in a string of Goldman alumni to strike out on their own and one of a growing number of Wall Streeters launching firms in the wake of last year’s meltdown.

Industry experts say that even the most talented managers are finding it difficult to raise the kind of big money routinely collected when markets boomed. Until investors recover, fund managers are finding $100 million is a typical starting point.

Working in Carhart’s favor will be his Goldman pedigree. Eric Mindich spun out to create Eton Park Capital Management, which made a record $3.5 billion launch in 2004, while Dan Och left 10 years earlier to form Och-Ziff Capital Management Group (OZM.N), one of the largest hedge fund firms.

“There is nothing better on a would-be hedge fund manager’s resume than the name Goldman Sachs,” said Larry Smith, chairman and chief investment officer at Third Wave Investors.

After earning a PhD in finance from the University of Chicago, Carhart followed alumnus Cliff Asness to help build Goldman’s quantitative investing business. Carhart took over when Asness left Goldman in 1998 to form AQR Capital.

The question is whether investors focus on Carhart’s track record, when Global Alpha routinely topped the charts, or on the losses realized in 2007 by computer-driven strategies he and partner Raymond Iwanowski managed.

Global Alpha, which managed $10 billion at the start of 2007, saw investors pull out $6 billion as the fund fell by more than a third. Computer models were caught off guard when the subprime crisis disrupted credit markets and triggered violent stock-price swings.

“We didn’t have good spill-over models back them. We thought in terms of our own community, but we did not think about how other markets’ behavior would effect our strategy,” Carhart said. “We expanded the scope of our thinking.”

Most of the damage was in the firm’s equities funds, namely the Global Equity Opportunities fund that “almost defaulted,” he said. Goldman and outside investors injected $3 billion.

Global Alpha has rebounded this year, rising “mid-20s” percent, said Carhart, who still has money in the fund.

Carhart and Iwanowski left Goldman in early 2008. Carhart, who has a non-compete agreement in effect until April, declined to say if his long-time partner would also join the new firm.

Since leaving Goldman, Carhart has enjoyed a rare breather in his career. He packed his family into an Airstream recreational vehicle to tour the United States.

Next year, he will start working on setting up his new business, lining up lawyers, prime brokers, staff and investors.

“I’m taking a lot of calls from people who are interested, he added.”

Reporting by Joseph Giannone and Svea Herbst; editing by Gerald E. McCormick and Andre Grenon

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