Goldman in $3bn bailout of fund

Goldman in $3bn bailout of fund
By James Mackintosh
Copyright The Financial Times Limited 2007
Published: August 14 2007 03:00 | Last updated: August 14 2007 03:00


Goldman Sachs is to inject $2bn (£993m) of its own money to bail out its Global Equity Opportunities hedge fund in an embarrassing admission that its highly regarded computerised funds malfunctioned last week.

The investment bank has raised a further $1bn from outside investors to support the $3.6bn GEO fund, which lost about $1.5bn when computer models failed to predict market turbulence.

The new investors include Hank Greenberg, former chairman of American International Group, hedge fund Perry Capital and Eli Broad, the US billionaire.

Goldman, the second-largest hedge fund manager, said its computer-driven, or quantitative, funds had been hit by unpredictable price movements as rivals with similar strategies dumped shares to cut their borrowing.

But it said it now saw opportunities in markets and believed most of the reduction in leverage by quantitative hedge funds was complete.

David Viniar, chief financial officer at Goldman, said valuations had got "way out of whack", and denied the bank was rescuing the fund.

"Given the dislocation in the markets we believe this is a good investment opportunity for us and the other investors we have brought in," he said.

The problems at the GEO fund reflect wider difficulties for computer-driven quantitative hedge funds, known as equity market neutral or statistical arbitrage funds, as stock markets oscillated wildly in the past two weeks.

"It has been a great time touse your mind rather than a machine," said a senior executive at one big fund of hedge funds.

Many of the biggest hedge funds have suffered as theircomputer models failed to respond correctly to the swinging markets.

Renaissance Technologies, one of the most respected managers, lost 8.7 per cent in August up to Thursday in its Institutional Equities Fund - before bouncing back on Friday to end the week down 4.9 per cent for the month.

Other big-name funds hit included some run by AQR Capital, Barclays Global Investors, Highbridge Capital Management, controlled by JPMorgan, and DE Shaw, in which Lehman Brothers has a 20 per cent stake, investors said.

But several fund managers said the entire sector had recovered in the past two days, making up a large chunk of their losses.

Goldman's two other big quantitative hedge funds, its flagship Global Alpha and the smaller North American Opportunities fund, have also been hard hit by the failure of their models.

Global Alpha dropped 27 per cent so far this year with MrViniar saying more than half of the loss was last week.

The scale of the losses at Goldman's funds reflect the high level of borrowing the funds had, with one investor putting gearing at eight to 10 times before it began to cut back last week.

Goldman said GEO's gearing now stood at six times and the new investments would reduce that to 3.5 times.