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Goldman Sachs "Global Alpha" Hedge Fund Down 6% in 2006

The asset management division of broker/dealer Goldman Sachs, Goldman Sachs Asset Management ("GSAM"), manages close to $600 billion dollars on behalf of its clients. Within this amount is a secretive hedge fund group that as of December 31st 2006, "eclipsed D.E. Shaw & Co. and Bridgewater Associates Inc. to become the largest hedge fund manager, with $29.5 billion in assets as of Dec. 31, according to Bloomberg and Chicago-based Hedge Fund Research Inc., which tracks the industry. That figure excludes Goldman's proprietary-trading funds and its funds of hedge funds."

This group runs a number of hedge funds and separate accounts for investors. The crown jewel is a hedge fund called "Global Alpha" run by the group head Mark Carhart and co-manager Raymond Iwanowski. Global Alpha has done quite well since its last prior losing year in 1999. In 2005, it notched an amazing 51 percent gross return. In 2006, however, the Global Alpha hedge fund lost 6% percent.

Many in the hedge fund community were surprised to hear that Global Alpha was down for the 2006 year when the average hedge fund returned close to 13% (less the S&P 500 return of 15.8 percent). Other uber large hedge fund groups, like Citadel Investments and SAC Capital, even produced gross returns in excess of 30%. Many asked what happened at Global Alpha?

Richard Tietelbann has an exclusive article on Bloomberg that is a must read for those interested in hedge funds or quantitative strategies. Toomre Capital Markets LLC highly recommends readers review this entire long article. In his excellent article entitled Loss at Goldman Hedge Fund Racks Duo at Secretive Global Alpha, Tietelbann explains:

In the 2005 report filed with the Irish exchange, Global Alpha reported a gross return of 51 percent for the year. The report says only two strategies -- global anomalies and the country bond selection -- suffered losses of more than 1 percent. During the first quarter of 2006, Global Alpha rose a net 9.5 percent, according to the semiannual report filed with the [Irish] exchange.

The next quarter, a bunch of the fund's strategies soured. Global Alpha lost 3.5 percent during the period. Its ``developed equity country selection'' fell 2.5 percent, hurt by bad bets on Japanese and Dutch stocks. Its developed country currencies strategy sank 1.9 percent, whacked by a wrong-way wager on the dollar and another against the pound. Emerging market currencies strategy sank 1.7 percent, nipped by short positions in the shekel and zloty.

Losses Mount

Piecing together the second half of 2006 is harder. A Global Alpha investor who asked not to be identified says the fund's roughly 10 percent slide last August mostly reflected bad bond market investments. Global Alpha also bet that stocks in Japan would rise while those in the rest of Asia would fall -- wrong; that U.S. stocks would stumble -- wrong; and that the dollar would rise -- wrong again. Global Alpha finished November down 11.6 percent in 2006.

The Arizona State Retirement System's Kapanak says hedge funds such as Global Alpha, which follow various strategies and simultaneously bet that this price will rise while that price falls, are designed to make money when world markets move in different directions. When markets and economies move more or less in lock step, these so-called multistrategy long/short funds struggle, he says. That's exactly what's happened lately, Kapanak says. ``You're seeing synchronous growth across the globe,'' he says. The U.S., European and Japanese economies are all growing, which means financial markets have been less volatile than they have been in the past, he says.

For Global Alpha, the big question is, Is all this an aberration, a brief setback on the way to greater heights? Or is it the start of something worse?

What Went Wrong?

One answer may be Global Alpha's 5.5 percent rally in December, which accelerated in early January, according to one investor. The fund has benefited from gains in the dollar, strength in Japanese and European stocks versus those in the U.S. and short positions in global government bonds. Still, Global Alpha may have a hard time repeating its past glories now that it's grown so big, says David Hendler, a senior analyst at New York-based CreditSights Inc. After Goldman Sachs said it would close the fund to new money at the end of 2005, about $2 billion flowed into Global Alpha. Even though the fund invests in so many markets, size could work against Global Alpha, as it has in the past against once-celebrated mutual funds such as Fidelity Magellan.

``When you're the biggest in a particular style, it's tough to shift your portfolio without everybody knowing it,'' Hendler says. ``There is the question of whether you can continue to perform at the same level.''

In this otherwise heady era for Goldman Sachs -- the richest since its founding in 1869 -- it's worth remembering what the late John L. Weinberg used to say. When times were good, Weinberg, a senior partner from 1976 to '90, would remind colleagues that good times don't last forever. ``Trees don't grow to the sky,'' he'd say. Neither do hedge fund returns.