Goldman Sachs is closing up shop at its flagship Global Alpha hedge fund. Global Alpha is one of the best-known quantitative hedge funds in the world. In its heyday the fund managed $12 billion. But after a series of bad bets, assets tumbled over 90% to $1 billion.
The fund’s downfall started in 2007 when computer-driven trading strategies went haywire. Global Alpha lost about 23% that August and reportedly finished the year down 40%. The fund regained some of its losses in 2008 and 2009 with gains of 4% and 30%, but it never fully recovered. Global Alpha was flat last year and it is down 12% so far this year.
It should come as no surprise to Global Alpha investors that Goldman is giving up on the fund. This is Goldman we are talking about. Goldman looks out for Goldman and Goldman alone. The last I checked, this is the same firm that was sued by the SEC for selling dubious mortgage securities to its own clients. Fiduciary duty apparently isn’t in the company manual.
When a hedge fund that is supposed to deliver consistent positive performance suffers massive losses, there is little incentive for management to keep the fund open. Assets under management often tumble, and performance fees plummet. I am not familiar with the details of the Global Alpha fund, but the performance fees of many hedge funds are only paid after the fund reaches a new high. With a 12% YTD loss, Global Alpha is still probably 30% below its previous peak. It could be years before Goldman again collects a performance fee from Global Alpha investors. Why not close the fund, start a new one, and take the coveted 20% share of the profits from the start? It’s reprehensible, but it’s classic Goldman.