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Investors Wary of Goldman Hedge Funds

Date: Wednesday, June 18, 2008
Author: Chidem Kurdas, New York Bureau Chief, Hedgeworld.com

 NEW YORK (HedgeWorld.com)—Amid Goldman Sachs Group Inc.'s relatively strong second quarter financial results in a challenging environment, hedge fund investments stood out as a sore spot.

Alternative assets under management, including hedge funds, stood at $146 billion as of the end of May, down 3% from $151 billion a year earlier and down 1% from this February. While this has to be seen in the context of a mass movement by investors into less risky assets, in particular money market funds, it does suggest that Goldman has not been as successful as expected in expanding its hedge fund pool.

Numerous press reports in the past six months claimed that Goldman raised anywhere from $6 billion to $10 billion for a new hedge fund, Goldman Sachs Investment Partners, managed by traders from the bank's proprietary stock trading desk. But the newly released alternative asset number shows no sign of a big inflow.

"Some of the performance in our alternative investments has not been great," said Goldman Chief Financial Officer David Viniar, speaking on a conference call. But he rejected the idea that investors may be shunning the funds because of performance problems and argued that it reflected the general environment.

"Investors wanted to be more invested in less risky assets," he said, explaining the shrinkage of Goldman's alternative and equity assets. "It is largely environmental and when flows change it will be environmental as well."

Regarding performance, he said some of the funds have done pretty well and some of the poor performers of last year recovered a lot this year. Goldman's Global Equity Opportunities and Global Alpha hedge funds had losses in 2007 but have apparently erased much of the red ink.

Incentive fee revenue reflected the adverse developments, dropping 60% from May 2007 to $8 billion for second quarter 2008. By contrast, management fee revenue went up. Hedge funds charge incentive fees while mutual funds typically are limited to management fees.

On the other hand, incentive fee income was up significantly on a six-month comparison with last year.

During the conference call Mr. Viniar was asked whether the move of some traders to the new hedge fund, GSIP, hurt the equity trading desk. "It's not affected at all by the movements to GSIP," he replied. "The people who went to the hedge fund in our asset management unit are great. The people who stayed are great. They've all been very successful over time."

He attributed the revenue loss to general weakness in the whole sector, as seen in the performance of relative value hedge funds especially in the equity market.

Meanwhile, providing brokerage services to hedge funds boosted the bank's bottom line. Prime brokerage revenues were up 30% from the second quarter of 2007, largely because of growth in the hedge fund assets receiving services from Goldman. Other banks such as Lehman Brothers have also benefitted from revenue growth in prime brokerage Previous HedgeWorld Story.