Highbridge, Goldman `Quant' Hedge Funds Lose Money

Date: Friday, August 10, 2007
Author: Katherine Burton and Jenny Strasburg, Bloomberg

Aug. 9 (Bloomberg) -- Hedge funds that use mathematical models to drive investment decisions, including those run by Highbridge Capital Management LLC, Goldman Sachs Group Inc. and Tykhe Capital LLC, are losing money in August.

Highbridge's $15 billion multistrategy fund fell 4 percent this month, the Tykhe Portfolios Ltd. Fund declined 7 percent in the first three trading days of August and Goldman Sachs's $9 billion Global Alpha fund dropped almost 12 percent in the two weeks that ended Aug. 3, according to investors. A second Goldman fund is selling positions in response to losses.

``If the conditions change, the models don't work as planned,'' said Luis Rodriguez, head of risk management for New York-based Manhattan Family Office LLC, which invests money on behalf of an undisclosed wealthy family.

Hedge funds' quantitative, or ``quant,'' models have been confounded by wider credit spreads stemming from losses in the subprime loan market. The difference in yields between the riskiest corporate bonds and U.S. Treasuries has expanded about 1.5 percentage points since the start of June. Volatility, as measured by the Chicago Board Options Exchange SPX Volatility Index, has climbed to an average of 22 in two weeks from 14 since June 2003.

Goldman Outflows

Goldman's Global Alpha losses may lead to more redemptions. Withdrawals for the fund's $6.2 billion offshore version totaled $394 million in the month ended June 30, according to an investor who declined to be identified. That was almost three times the $142 million in new money added.

The fund decreased 8 percent during the last full week of July and was down 16 percent from the beginning of January through Aug. 3. There is an Aug. 15 deadline for Global Alpha investors who want to redeem money on Sept. 30.

The $29 billion Renaissance Institutional Equities Fund, overseen by a team led by James Simons at East Setauket, New York-based Renaissance Technologies Corp., also has faltered this year. The fund was down 0.4 percent through Aug. 3, after having been up 5.8 percent a month earlier.

Tykhe Capital LLC's fund fell 9.6 percent this year through Aug. 3. The New York hedge-fund firm, which manages about $1.8 billion, is trimming holdings, the Wall Street Journal reported, citing an investor briefed by Tykhe executives.

Man Group Plc, the world's largest publicly listed hedge- fund manager, named Tykhe in May to manage proceeds from its planned U.S. share sale. The offering by the London-based firm hasn't been scheduled.

French Bank

Two Bear Stearns Cos. hedge funds filed for bankruptcy protection in the Cayman Islands two weeks ago because of subprime losses. The New York-based securities firm then blocked investors from withdrawing money from a third fund. BNP Paribas SA, France's largest bank, stopped redemptions from three investment funds because it couldn't ``fairly'' value the holdings.

Goldman Sachs, based in New York, has sold positions in its North American Equity Opportunities hedge fund because of declines, a person with knowledge of the matter said. The fund lost 15 percent of its value this year as of July 27. It had $463.5 million in assets, according to a July 18 regulatory filing by Goldman Sachs Asset Management.

Goldman spokeswoman Andrea Raphael declined to comment.

Highbridge, which manages $37 billion from New York, said its largest fund was investing in Asian, U.S. and European equities. The fund has risen 5 percent this year, according to a letter sent to investors. A publicly traded fund with $1.8 billion in assets that uses no leverage has fallen 5.3 percent so far in August.

Brooke Harlow, a spokeswoman for Highbridge, declined to comment.

`Opportunities'

Highbridge and other funds are blaming declines on other quantitative managers selling positions.

``While we cannot predict when this technical pressure will subside, we believe it will present significant opportunities which we are well positioned to capitalize on,'' according to a letter. Fund borrowings are at the lowest level in its 15-year history, the letter said.

Black Mesa Capital, a Santa Fe, New Mexico-based quant hedge-fund firm, said an undisclosed hedge fund or investment bank is liquidating trading portfolios, MarketWatch reported, basing its information on a letter sent to investors. Black Mesa's own fund has slumped 7.5 percent this month.

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 ;