Goldman's Global Alpha Reaches Its Omega Moment: The Ticker

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By William D. Cohan

The understandable hullabaloo about the shocking $2 billion loss by the rogue trader at UBS in London has obscured another momentous event in the world of Wall Street risk-taking: Wednesday’s announcement that Goldman Sachs was closing its Global Alpha Fund because of another year of poor performance.

For the year to date, Global Alpha, with about $1 billion in assets, was reportedly down about 12 percent, and investors were seeking redemptions. According to the letter sent to the fund’s investors, Goldman intends to close the fund and distribute around 90 percent of the assets back to investors, with the remainder held back pending the resolution of a legal claim made by Lehman Brothers Holdings, Inc.

Global Alpha was the brainchild of the legendary hedge-fund manager Cliff Asness, one of the original quant investors who used proprietary and highly sophisticated computer models to buy and sell baskets of stocks and other securities hoping to take advantage of the market’s failure to value them correctly. In late 1995, Asness persuaded Goldman to allow him and his team of high-powered mathematicians to use a small amount of Goldman partners’ money to start a fund.

In short order, the team turned the partners’ $10 million grubstake into $100 million. Goldman then opened the fund, named Global Alpha, to outside investors. (Asness once told me the firm used the  pitch, “You get the Goldman secret sauce with this smart team.") The fund was a rocket ship, up 111 percent in 1996 and 42 percent in 1997. By that time, they were managing $7 billion in total. (In early 1998, Asness and his team left to start their own hedge-fund, Applied Quantitative Research. AQR now has $41 billion under management.)

After Asness left, Global Alpha had a mixed record but had managed to accumulate more than $11 billion in assets by 2007. But the fund collapsed that summer as the global markets began to implode and the magnitude of the financial crisis was becoming better known. In August 2007 alone, the fund was down 23 percent; it fell 40 percent for the year. To Goldman’s credit, though, it decided to see the Global Alpha fund through those hard times by investing $2 billion of its own money into it as well as another $1 billion from its well-healed clients, including billionaire Eli Broad; a C.V. Starr fund run by former AIG chief executive officer Hank Greenberg; and the hedge fund Perry Capital, whose founder Richard Perry was a Goldman alumnus.

By contrast, a month early Bear Stearns had allowed two if its hedge funds, with some $1.5 billion of investors’ capital, to collapse and then to be liquidated. The Great Recession was off to the races.

(William D. Cohan is a Bloomberg View columnist)


-0- Sep/16/2011 18:51 GMT