Is it time to get worried about Goldman Sachs’s Global Alpha fund? The question is on the lips of many hedge fund industry participants. The $10 billion fund has been losing money for more than a year, and the impact of this on fees is well demonstrated in the firm’s first-quarter results. Net revenues generated from incentive (performance) fees for the asset management and securities services business of Goldman Sachs were just $90 million in the three months ending February 23, 2007. That compares with $739 million for the quarter ending February 24 2006. The significant fall, say analysts, was a direct result of the poor performance of the Global Alpha fund.
Over 2006, the fund, which employs a global macro strategy, lost about 9%. HFRI’s macro index, which is considered the benchmark for global macro hedge funds’ performance, returned 8.15% over 2006, and the average performance of all hedge funds tracked by HFRI was 12.89%. In the first two months of 2007, the Global Alpha fund continued to lose money, posting a loss of 2%. Again, the HFRI macro index was up, around 0.75%, for the same period.
In a monthly investor letter in February, this year’s losses were attributed to bets that the Norwegian krone and Japanese yen would fall in value. Last year’s losses were caused by wrong bets on Japanese equities, US and Asian stock markets and the US dollar.
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Global Alpha’s performance knocks Goldman Sachs’ fees |
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Group Q1 ‘07 net revenues (unaudited) |
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Source: Goldman Sachs Q1 2007 Earnings Report |
Investors in the fund say Goldman Sachs’s representatives are unconcerned as yet by the performance. "Over a five-year period, Global Alpha’s returns are still in the double digits. Last year was a bad year, yes, but as for this year two months is a little too soon to make a judgement," says a source familiar with the fund and its two managers, Mark Carhart and Raymond Iwanoski. He adds that Carhart and Iwanoski appear confident that they can turn around the performance. A hedge fund manager adds: "Any other fund that lost that would be strung up, and would see investors walk out the door. But this is not any other fund. It’s Goldman Sachs. Still, another few months of losses and we’ll see how the firm reacts."
UBS analyst Glenn Schorr says that although the drop in fees is significant, the fund’s recent dip in performance is unlikely to affect Goldman Sachs Asset Management as a whole. "GSAM, other than the Global Alpha fund, has produced some great performance and their net asset inflows are very strong," he says. "There are lots of different products and funds that the asset management business has that can counter the volatility of returns from the macro fund." Assets under management increased 26% at the end of the first quarter compared with Q1 in 2006, taking the total assets under management to $719 billion. Net asset inflows of $35 billion were recorded in the first quarter. Because of this increase, management fees increased year on year at the end of the first quarter to $982 million, bolstering total net revenues for the asset management business. Schorr adds that GSAM will need to broaden its products even further, however, in order to bring in higher growth and soften the effects of any one fund’s performance.