Goldman Sachs Group Inc., the second- largest hedge-fund manager, will invest about $2 billion to bail out its Global Equity Opportunities Fund after a 28 percent decline this month.
Investors including Maurice ``Hank'' Greenberg, the former chairman of American International Group Inc., and billionaire Eli Broad will put about $1 billion into the hedge fund, New York-based Goldman said today in a statement. Assets dropped by $1.4 billion to $3.6 billion in the past two weeks as its computer-driven investment strategies were upended by turmoil in the financial markets.
``It looks better for them if others are willing to put money in alongside them,'' said Benjamin Wallace, who helps manage about $750 million at Grimes & Co. in Westborough, Massachussetts. ``Goldman spreads its risk out a bit but also demonstrates that other people want to be involved in this.''
Goldman said it wasn't rescuing the fund, which had fallen along with other so-called quant funds that use mathematical formulas to make trades. Instead, the infusion will give managers ``more flexibility to take advantage of the opportunities we believe exist in current market conditions,'' the world's second-largest securities firm said.
``Current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said in the statement.
Global Alpha
Global Alpha, another Goldman quant hedge fund, has lost 27 percent this year. The company isn't pumping more money into that fund.
Goldman shares rose $2.59, or 1.4 percent, to $183.09 at 10:19 a.m. in New York Stock Exchange composite trading. The Standard & Poor's 500 Index gained 0.6 percent to 462.51.
Hedge funds are largely unregistered pools of capital that cater to wealthy individuals and institutions and allow managers to participate substantially in profits from investments. They try to make money in rising as well as falling markets.
The $1.7 trillion industry has been roiled in July and August as credit spreads widened to the most in two years and U.S. stocks rose or fell by more than 1 percent on 13 days. Also posting losses in recent weeks are quant funds run by AQR Capital Management LLC and Highbridge Capital Management LLC.
The troubles as some large quant funds lost money in their fixed-income or credit positions on the back of a decline in the subprime mortgage market. The firms were forced to sell more liquid stock investments to raise cash and reduce debt, according to a report published by Lehman Brothers Holdings Inc. analyst Matthew Rothman.
Models Fail
The selling caused the models used by quantitative funds to short circuit. Stock positions that the models expected to fall in price rose, and shares they expected to rise, fell.
``The models (ours included) are behaving in the opposite way we would predict and have seen and tested for over very long time periods (45+ years),'' Rothman wrote.
One of AQR's Global Stock Selection funds, which uses borrowed money, lost 21 percent year to date, according to investors. The fund has less than $1 billion in assets.
The pool has ``come under severe pressure'' resulting in ``shockingly bad'' returns for the fund and others with similar strategies, according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the ``strategy getting too crowded,'' rather than the models not working.
AQR, Highbridge
AQR's larger asset-allocation fund was up about 3.5 percent in August, and the firm has received commitments for at least $700 million in new capital. AQR, based in Greenwich, Connecticut, manages about $10 billion in hedge funds.
Highbridge's $1.7 billion Highbridge Statistical Opportunities Fund, which invests in U.S., European and Asian equities, fell 18 percent in the month through Aug. 8, and 16 percent year to date, the New York-based firm said in a letter to investors. Highbridge is controlled by JPMorgan Chase & Co., the largest manager of hedge funds.
Executives at the firms declined to comment.
The difference in yields between the riskiest corporate bonds and U.S. Treasuries has expanded nearly 2 percentage points since June, according to Merrill Lynch & Co. index data. Volatility, as measured by the Chicago Board Options Exchange SPX Volatility Index, has averaged more than 23 since the beginning of August. Between June 2003 and the end of July 2007, it averaged 14.
Investors including Maurice ``Hank'' Greenberg, the former chairman of American International Group Inc., and billionaire Eli Broad will put about $1 billion into the hedge fund, New York-based Goldman said today in a statement. Assets dropped by $1.4 billion to $3.6 billion in the past two weeks as its computer-driven investment strategies were upended by turmoil in the financial markets.
``It looks better for them if others are willing to put money in alongside them,'' said Benjamin Wallace, who helps manage about $750 million at Grimes & Co. in Westborough, Massachussetts. ``Goldman spreads its risk out a bit but also demonstrates that other people want to be involved in this.''
Goldman said it wasn't rescuing the fund, which had fallen along with other so-called quant funds that use mathematical formulas to make trades. Instead, the infusion will give managers ``more flexibility to take advantage of the opportunities we believe exist in current market conditions,'' the world's second-largest securities firm said.
``Current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said in the statement.
Global Alpha
Global Alpha, another Goldman quant hedge fund, has lost 27 percent this year. The company isn't pumping more money into that fund.
Goldman shares rose $2.59, or 1.4 percent, to $183.09 at 10:19 a.m. in New York Stock Exchange composite trading. The Standard & Poor's 500 Index gained 0.6 percent to 462.51.
Hedge funds are largely unregistered pools of capital that cater to wealthy individuals and institutions and allow managers to participate substantially in profits from investments. They try to make money in rising as well as falling markets.
The $1.7 trillion industry has been roiled in July and August as credit spreads widened to the most in two years and U.S. stocks rose or fell by more than 1 percent on 13 days. Also posting losses in recent weeks are quant funds run by AQR Capital Management LLC and Highbridge Capital Management LLC.
The troubles as some large quant funds lost money in their fixed-income or credit positions on the back of a decline in the subprime mortgage market. The firms were forced to sell more liquid stock investments to raise cash and reduce debt, according to a report published by Lehman Brothers Holdings Inc. analyst Matthew Rothman.
Models Fail
The selling caused the models used by quantitative funds to short circuit. Stock positions that the models expected to fall in price rose, and shares they expected to rise, fell.
``The models (ours included) are behaving in the opposite way we would predict and have seen and tested for over very long time periods (45+ years),'' Rothman wrote.
One of AQR's Global Stock Selection funds, which uses borrowed money, lost 21 percent year to date, according to investors. The fund has less than $1 billion in assets.
The pool has ``come under severe pressure'' resulting in ``shockingly bad'' returns for the fund and others with similar strategies, according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the ``strategy getting too crowded,'' rather than the models not working.
AQR, Highbridge
AQR's larger asset-allocation fund was up about 3.5 percent in August, and the firm has received commitments for at least $700 million in new capital. AQR, based in Greenwich, Connecticut, manages about $10 billion in hedge funds.
Highbridge's $1.7 billion Highbridge Statistical Opportunities Fund, which invests in U.S., European and Asian equities, fell 18 percent in the month through Aug. 8, and 16 percent year to date, the New York-based firm said in a letter to investors. Highbridge is controlled by JPMorgan Chase & Co., the largest manager of hedge funds.
Executives at the firms declined to comment.
The difference in yields between the riskiest corporate bonds and U.S. Treasuries has expanded nearly 2 percentage points since June, according to Merrill Lynch & Co. index data. Volatility, as measured by the Chicago Board Options Exchange SPX Volatility Index, has averaged more than 23 since the beginning of August. Between June 2003 and the end of July 2007, it averaged 14.
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