Goldman's Global Alpha Gains 19% After 2007 Plunge

By Tom Cahill and Katherine Burton

June 24 (Bloomberg) -- Goldman Sachs Group Inc.'s Global Alpha hedge fund has gained 19 percent this year after a plunge of almost twice that amount in 2007, said three people with knowledge of its performance.

The rebound through mid-June reflects improved returns for quantitative funds, which rely on computers to select trades, after investors rushed to exit similar strategies last year during the credit crunch. Goldman's Global Equities Opportunities Fund, which required a $3 billion cash infusion last year, has gained about 7 percent, said the people, who declined to be identified because the returns are confidential.

Global Alpha, run by Mark Carhart and Raymond Iwanowski, shrank to about $2.5 billion from a peak of $12 billion, while Global Equities fell to $1 billion in assets from $6 billion. New York-based Goldman manages $146 billion in alternative assets including hedge funds and private equity.

``One of the lessons learned is we cannot be as big as we were,'' said Robert Litterman, chairman of Goldman's quantitative investments, at the GAIM International hedge fund conference in Monaco on June 19. ``We couldn't get out and if we had it would have made it worse. We had to ride it out.''

Goldman now uses proprietary trading ideas for about 35 percent of its positions, compared with 5 percent last August, when funds with similar trades rushed to unwind them in what Litterman called a ``de-leveraging explosion.''

``It was a disaster by any description,'' possibly prompted by funds selling to raise capital for losses elsewhere, such as subprime mortgages, Litterman said.

Goldman spokeswoman Andrea Raphael declined to comment.

Quant Funds Gain

While quantitative funds have prospered, hedge funds overall are roughly flat through May in the $1.9 trillion industry's worst start to the year in nearly two decades, according to Chicago-based Hedge Fund Research Inc.

``Quant funds are doing extremely well,'' said Marco Dion, an analyst at JPMorgan Chase & Co. Dion said last year's shakeout left only investors committed to the strategy, so quant fund managers haven't faced as many redemptions as some other strategies. Dion estimated that many so-called long-short quant funds may be up 10 percent to 15 percent this year.

Litterman said he had missed signs of the proliferation of common quant trading strategies. One was spotting a book on the topic in a bookstore in Malaysia. Another was realizing the interest in Goldman's own funds showed investors were pouring capital into the investment style, including through so-called multistrategy funds, he said.

``It was like turning a light on in a dark room to see the amount of crowdedness,'' Litterman said. ``We were less attuned to it because we didn't think of it as a trade, we thought of it as a business.''

Goldman and investors including Maurice ``Hank'' Greenberg, the former chairman of American International Group Inc., pumped about $3 billion into Goldman's Global Equities to shore it up last August.