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Goldman's Flagship Hedge Fund Fell 5.7% in February (Update3)

Date: Wednesday, April 4, 2007
Author: Jenny Strasburg

April 3 (Bloomberg) -- Goldman Sachs Group Inc.'s flagship hedge fund, managed by Mark Carhart and Raymond Iwanowski, lost 5.7 percent in February, hurt by wrong-way bets on stocks, global bonds and currencies including the Japanese yen.

The decline left the $10 billion Global Alpha fund down 2 percent for the year through Feb. 28, according to a monthly update sent to investors. That compared with an average gain of 1.9 percent for hedge funds worldwide, according to data compiled by Hedge Fund Research Inc. in Chicago.

Global Alpha generated about $700 million in fees for the bank in 2006, when the fund fell about 9 percent. That was the first annual decline in seven years and followed an almost 40 percent gain in 2005. Goldman earned $9.5 billion in the year ended Nov. 24.

``This is a macro fund making big bets, and they stumbled,'' said David Nelson, who manages $27 million and is chief executive officer of New York-based hedge fund DC Nelson Asset Management LLC. ``Volatility isn't unusual for this kind of fund because they want to have huge, double-digit years. As an investor I would not be concerned until mid-year this year.''

Global Alpha's returns were hurt by wagers that the Norwegian krone and Japanese yen would decline. Both currencies rose 1.8 percent against the dollar in February.

Losers and Winners

``The U.S. equity market-neutral strategy was down for the month,'' fund managers said in the February update. ``The stocks/bonds/cash-timing strategy detracted from overall performance due to our short position in global bonds.''

The fund's losses were offset by bets on rising values of bonds in the U.S. and Australia, according to the letter.

Goldman's hedge-fund assets rose 48 percent to $32.5 billion in 2006, making it the second-largest U.S. hedge-fund manager behind New York-based JPMorgan Chase & Co., according to a survey by Absolute Return magazine. JPMorgan managed $34 billion at the end of December.

Goldman Sachs spokesman Christopher Williams declined to comment.

Goldman is expanding its investor reports to provide more detail about volatility and risks of funds, Eric Schwartz and Peter Kraus, co-heads of New York-based Goldman's money- management division, told clients in a letter accompanying the February update.

`Particularly Volatile'

``Several of our funds are particularly volatile, as we have strived on behalf of our clients to optimize for capital efficiency,'' the letter said. ``Because hedge-fund products are complex, we believe no single metric on its own can comprehensively provide an assessment of the risks investors face.''

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

Global Alpha declined 8.9 percent in August on losing investments in global bond markets, and it extended the losses through November to end the month down 11.6 percent, investors said. Performance was hurt by bets favoring rising equities in Japan, declining stocks in the rest of Asia and the U.S. and a strengthening dollar. The fund managers recovered some of those losses in December as markets rallied at year end.

The Goldman fund by design makes high-risk bets that can result in volatile swings in its performance. The average hedge fund returned 13 percent in 2006, according to Hedge Fund Research. Macro funds like Global Alpha rose about 8 percent.

As a benchmark for Global Alpha, Goldman Sachs uses the one- month U.S. dollar-based London interbank offered rate, or Libor, according to the investor update. In the 12 months ended Jan. 31, the fund was down 5.9 percent, while the fund's benchmark yielded 5.4 percent.

Global Alpha has returned about 14 percent annualized over the past five years, according to the February report. Goldman's hedge-fund business is part of New York-based Goldman Sachs Asset Management.

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net .