Struggling Goldman hedge fund risks losing investors

Date: Friday, June 1, 2007
Author: Jenny Strasburg, Bloomberg

NEW YORK -- Goldman Sachs Group Inc.'s largest hedge fund fell 3.4 per cent in the first four months of this year, trailing peers because of losses on bonds and currencies, according to a report sent to investors last week.

The decline in the Global Alpha fund compares with the average hedge fund advance of 4.9 per cent, figures compiled by Chicago-based Hedge Fund Research Inc. show. The fund has dropped 12 per cent since 2005, when it rose 40 per cent and attracted more than $3-billion (U.S.) of new cash.

The $10-billion fund, managed by Mark Carhart and Raymond Iwanowski, struggled in a 16-month stretch when the Standard & Poor's 500 Index climbed 22 per cent. Global Alpha's decline has cut into fees that reached $700-million after the gains of 2005 and has made New York-based Goldman, the biggest U.S. securities firm by market value, vulnerable to client withdrawals.

"Typically, an investor will accept one down year," said Gregory Dowling, vice-president for alternative investments at Cincinnati-based Fund Evaluation Group LLC. His firm isn't an investor in the Goldman fund. "After two years, investors may get concerned about the stability of the investment team and client base."

Goldman spokesman Peter Rose declined to comment about the fund's performance.

Mr. Carhart and Mr. Iwanowski, both 41, must recoup the losses to collect incentive fees on the cash that followed the 2005 rally. Their management fees, which equal 1.5 to 2 per cent of assets, have been reduced by the fund's decline.

Global Alpha, which started in 1995 with $10-million, advanced 0.4 per cent last month on bets that global stocks and metals prices would increase, according to its latest investor letter. Hedge funds globally gained an average 2 per cent in April, according to Hedge Fund Research.

The Goldman fund's profits were trimmed by wagers that currencies, including the Canadian dollar and Norwegian krone, would decline. The Canadian dollar gained 4 per cent against the U.S. dollar in April, and the krone gained more than 2 per cent.

The fund makes high-risk bets, often based on computer-driven models, which can lead to swings in performance. One of its objectives is a low level of correlation, or degree of shared fluctuation, with the S&P 500. Goldman has marketed Global Alpha as having a target annual return of 20 per cent, according to two investors who declined to be named because the fund is private.

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