Aug. 13 (Bloomberg) -- Goldman Sachs Group Inc.'s Global Equity Opportunities Fund fell 13.9 percent in the 12 months ended July 31 as its computer-driven trading strategies were disrupted by turmoil in financial markets, people familiar with the hedge fund said.

The fund has more than $5 billion in assets, said the people, who asked not be identified because its performance is private. The MSCI World Index of stocks gained 21 percent including dividends in the same period.

Goldman's $8 billion Global Alpha fund dropped 26 percent this year through Aug. 9 as its mathematical models also failed to keep pace with market changes. Hedge-fund losses have tarnished the reputation of the New York-based firm's asset- management unit, which generated more than $1 billion in fees in the second quarter.

``These strategies break down when there are sharp market swings,'' said Andrew Lo, a professor of finance and investment at the Massachusetts Institute of Technology's Sloan School of Management in Cambridge, Massachusetts. ``We're in for a long period of uncertainty and disruption,'' said Lo, who also runs the hedge-fund firm AlphaSimplex Group LLC of Cambridge.

Global Equity lost 2.6 percent this year through July, the people said. Peter Rose, a Goldman spokesman, declined to comment.

The $1.7 trillion hedge-fund industry has been roiled in July and August as credit spreads widened to the most in two years and U.S. stocks rose or fell by more than 1 percent on 13 days.

List of Casualties

Two funds managed by Bear Stearns Cos. collapsed because of losses on subprime mortgages. Sowood Capital Management LP, run by a former manager of Harvard University's endowment, is liquidating after a 60 percent loss on corporate bonds and loans.

Hedge funds are largely unregistered pools of capital that cater to wealthy individuals and institutions and allow managers to participate substantially in profits from investments. They try to make money in rising as well as falling markets.

Quantitative hedge funds like Global Equity rely on complex formulas to select securities to buy and sell. Other quant managers posting losses include AQR Capital Management LLC, Highbridge Capital Management LLC and New York-based Tykhe Capital LLC.

One of AQR's Global Stock Selection funds, which uses borrowed money, lost 21 percent year to date, according to investors. The fund has less than $1 billion in assets.

The pool has ``come under severe pressure'' resulting in ``shockingly bad'' returns for the fund and others with similar strategies, according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the ``strategy getting too crowded,'' rather than the models not working.

Asset-Allocation Fund

AQR's larger asset-allocation fund was up about 3.5 percent in August, and the firm has received commitments for at least $700 million in new capital. AQR, based in Greenwich, Connecticut, manages about $10 billion in hedge funds.

Highbridge's $1.7 billion Highbridge Statistical Opportunities Fund, which invests in U.S., European and Asian equities, fell 18 percent in the month through Aug. 8, and 16 percent year to date, the New York-based firm said in a letter to investors.

Executives at the firms declined to comment.

The difference in yields between the riskiest corporate bonds and U.S. Treasuries has expanded nearly 2 percentage points since June, according to Merrill Lynch & Co. index data. Volatility, as measured by the Chicago Board Options Exchange SPX Volatility Index, has averaged more than 23 since the beginning of August. Between June 2003 and the end of July 2007, it averaged 14.

Model Behavior

The troubles started in late July and early August as some large quantitative hedge funds lost money in their fixed-income or credit positions on the back of a decline in the subprime mortgage market. The firms were forced to sell more liquid stock investments to raise cash and reduce debt, according to a report published by Lehman Brothers Holdings Inc. analyst Matthew Rothman.

The selling caused the models used by quantitative funds to short circuit. Stock positions that the models expected to fall in price rose, and shares they expected to rise, fell.

``The models (ours included) are behaving in the opposite way we would predict and have seen and tested for over very long time periods (45+ years),'' Rothman wrote.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Jenny Strasburg in New York at jstrasburg@bloomberg.net

Last Updated: August 13, 2007 00:01 EDT