2nd Goldman hedge fund is in trouble

Discussion in 'Wall St. News' started by RedDuke, Aug 9, 2007.

  1. RedDuke


    It gets more interesting each day. It looks like all this talk about market nutral advanced algorithmic trading is a crap, and when put to test - it fails.

    Second Goldman Hedge Fund
    Moves to Sell Some Positions

    August 9, 2007 1:11 p.m.

    A second Goldman Sachs Group Inc. hedge fund has hit a rocky patch and has sold down some of its positions, according to a person familiar with the matter.

    Goldman's North American Equity Opportunities hedge fund had $767 million under management earlier this year. The Fund was down over 15% this year, through July 27, according to investors and was down more than 11% in July alone. It is not known how much the fund has sold in recent days.

    Word of the turmoil at this fund comes as Goldman's most widely known internal fund, Global Alpha, has been forced to liquidate certain positions to curb its risk profile. That fund, which has roughly $9 billion under management, was rumored to be facing liquidation -- a notion a Goldman spokesman has called "categorically untrue." Goldman today has privately thrown cold water on a published report that North American Equity Opportunities hedge fund is liquidating.

    The North American Equity Opportunities hedge fund is known as a "equity market neutral fund" and relies heavily on computer programs to make market bets. Equity market neutral means the fund buys certain stocks and bet against others, by shorting their shares. The idea is to generate impressive returns in any kind of market. This strategy is seen as relatively conservative, and can generate steady gains, the funds often feel comfortable using leverage, or borrowed money, to boost their returns. Most funds perusing such strategies hope to uncover small price discrepancies and rely on large slugs of borrowed money which magnifies losses when the bets go wrong. It is not known how much borrowed money the North American Equity Opportunities Fund uses.

    Some funds that have run into trouble in recent weeks are ones like Global Alpha and the North American Equity Opportunities that rely largely on computer programs to dictate trading. In some cases these models that grossly underestimated how risky the market environment had become.

    News that some Goldman funds are liquidating positions is a blow to Goldman, one of Wall Street's most admired investment banks. The firm has made a winning bet in recent years on savvy internal trading and using a relatively high risk profile to generate outsize returns. But along with many other brokerages -- including UBS AG and Bear Stearns Cos., both of which shut down internal hedge funds earlier this year after weathering major losses -- Goldman is now contending with an unpredictable global market that has been shaken by problems in the U.S. housing sector.

    Hedge Fund Tykhe Capital Hit With Losses

    Tykhe Capital, a New York hedge-fund firm that manages about $1.8 billion, has suffered losses of about 20% so far in August, and is moving quickly to trim its investment positions, according to an investor in the firm briefed by Tykhe executives. The selling by Tykhe and a range of similar hedge funds is putting pressure on the holdings of a number of funds.

    Tykhe isn't closing down, according to the investor. Repeated calls to Tykhe were not returned.

    Tykhe, launched by several executives who left hedge-fund powerhouse D.E. Shaw & Co. in 2002, uses quantitative models to try to generate impressive gains that are "market neutral," or returns that don't depend on a rising market. The strategy has been embraced by some of the biggest names in the hedge-fund world, in part because it is popular with pension plans and other institutional investors, who have flocked to hedge funds. One inspiration for the ambitions of a number of funds: the huge gains posted by Jim Simons's Renaissance Technologies Corp., a quantitative hedge fund.

    But the strategy has foundered lately. The Tykhe Portfolios Ltd. Fund, a $600 million fund, lost almost 8% in July, according to investors. A $300 million fund run by the firm dropped about 4% in the month, through July 27. The losses have snowballed lately, however. It's been a quick turnaround -- during the first six months of the year, Tykhe's funds were up, and experienced very little volatility, according to an investor.

    Tykhe has been selling some of its holdings, and reducing its leverage, which has been pressure on holdings shared by other hedge funds that pursue similar strategies. Tykhe was borrowing $4 for each $1 of capital it holds until recently, but is now reducing that leverage ratio to $1 for each $1 of capital, according to the hedge fund's investor.
  2. pkts


    Funny thing, golden Goldman says yesterday that they have nothing to announce after the close. And then news comes out today that they are having trouble.

    I guess Bear Stearns should have read the GS playbook and just never announce the problem in a press statement?

    "Didn't happen"
  3. Why don't they just call Jack Hershey to save the day? We have it on good authority here that he can do anything.
  4. Interesting Tykhe is getting hit. They had an amazing three year track record. I believe MAN GROUP seeded them with a lot of capital.
  5. Forced liquidation in market neutral funds would explain a lot of seemingly "random" moves in many issues you can see across the board.

    A lot of issues with reasonable prices and "good" numbers (by quant metrics) down 10%, 15%, 18% a day... on no news and on below average volume (i.e. no broad selling, just a bunch of somebodys having to sell against a market without a bid). And what are crap stocks by many metrics holding tight and gaining 3%, 4%, 5%.

    It just feels a bunch of these funds had a lot of the same issues in their books and are forced to liquidate.
  6. RedDuke


    It just amazes me how true old sayings are.

    One of them, ”Never confuse brains with bull market”.

    It seems that all these funds do well when markets are bullish, but we are not really bearish yet, and already the losses are huge.

    However, the fund managers are fine. With the amount of $ they accumulated in recent years, even if the funds belly up, they would still keep their enormous compensations. This is the HOLLY GRAIL of trading/investing. Take huge risks with OPM, do well for few years, and when shit hits the fan, oh well. Something for all of us to think about.