Monday, August 13, 2007
Goldman's GEO fund gets $3 billion injection
NEW YORK (MarketWatch) -- Goldman Sachs said Monday that it is pumping $2 billion of its own money, along with $1 billion from new investors, into its Global Equity Opportunities hedge fund, which lost more than $1 billion last week, or about a third of its value.
Goldman has been the focus of intense speculation in the markets recently, as investors try to figure out how much money they have lost in their hedge funds, and, how much selling they have been doing that could affect the broader markets.
Investors were mainly focused last week on the Goldman Sachs Global Alpha fund, which was reportedly selling large positions in various assets to pay off the loans it had used to acquire the money-losing positions. Goldman is not injecting any money into Global Alpha.
In essence, Goldman is predicting that the disruptions that have rattled markets this month have made the fund's investment more attractive, and its assets under valued.
acknowledged steep losses at its Global Equity Opportunities and other funds in a news release and on a conference call. All the fresh money is coming from new investors in the fund, Goldman said.
Goldman shares rose 2.3%, to $184.76, in early action, but sold off and traded up 0.4% at $181.17 in early afternoon trade.
Global Equity Opportunities and other so-called "quant funds" use a market-neutral strategy, which aims to balance long positions with short trades, or bets against securities. Others are so-called statistical arbitrage funds, which analyze the historical relationships between related securities and trade when those relationships get out of whack.
The funds employ powerful computer programs to spot these relationships, and they put to use borrowed money to amplify the gains. However, this leverage can also result in magnified losses.
Goldman stated in a news release on Monday: "Many funds employing quantitative strategies are currently under pressure as recent conditions have resulted in significant market dislocation. Across most sectors, there has been an increase in overlapping trades, a surge in volatility and an increase in correlations. These factors have combined to challenge many of the trading algorithms used in quantitative strategies."
David Viniar, Goldman's chief financial officer, said that the Wall Street powerhouse isn't unwinding its Global Alpha and North American Equity Opportunities funds. However, both, along with Global Equity Opportunities, have all had steep losses.
He said that the three funds would have total assets of roughly $13 billion, after the new investment.
Viniar said Global Alpha has lost 27% of its value in the year to date, with half of those losses coming last week.
Viniar also said the firm is actively "delevering" the funds, reducing the debt they use to make market bets. This process is about 75% to 100% completed, he said.
New investors joining Goldman in Global Equity Opportunities include C.V. Starr & Co., Perry Capital and Las Angeles investor Eli Broad, among others.
According to Goldman, the investors are in agreement that "the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals."
C.V. Starr is an insurer and investment firm run by Maurice "Hank" Greenberg, the former chief executive of insurance giant American International Group.
Goldman said Global Equity Opportunities, which originally had a value of $3.6 billion, has suffered "significantly," but a dollar amount wasn't disclosed. Goldman also said it has reduced risk and leverage in the fund.Greg Morcroft is MarketWatch's financial editor in New York.
Posted by Bud Fox at 10:26 AM