Goldman Sachs’ move to inject $2bn of its own money and an additional $1bn from outside investors into its troubled Global Equity Opportunities hedge fund has generated much comment. So, subsequently, will Goldman’s characterisation of its move (in a Monday conference call with analysts) as an “attractive opportunity” for both the investment bank and for clients it brought in to invest.
Lex, however, questioned whether Goldman’s move introduces moral hazard “where investors’ behaviour is changed because of the expectation that they will not have to bear all the consequences of their actions”.
The FT’s Short View columnist, John Authers, says he learnt two things from the Goldman bail-out and a similar development at Renaissance Technologies: “First, there is financial contagion: to repair damage done to their portfolios by ‘bad’ investments, funds are selling their ‘good’ positions. This is the scenario that was most feared as bond and credit markets began unwinding two months ago.”
Second, he says, there were so-called “crowded trades”: “Many funds using the same quant models — or maybe just copying each other — had made the same bets. That creates the conditions for losses to ’snowball’,” he says, adding:
It means many other funds made the same bets that lost money for Renaissance and Goldman. This matters. These two institutions are among the world’s most respected financial operators. Their reputation can survive last week. Goldman has access to capital in-house.
But does this apply to all the other funds that, they tell us, made the same bad bets. What happens if they cannot raise capital?
Meanwhile, the FT’s banking editor Peter Thal Larsen says Goldman is paying the price for being big - a mixed blessing, and a curse when shares begin to move in opposite ways to those predicted by computer models. These moves triggered selling by the funds as they attempted to cover their losses and meet margin calls from banks. This in turn exacerbated the share price movements.
A broader question, says Thal Larsen, is “what damage the events of the past week mean for quantitative strategies”. David Viniar, Goldman’s CFO, said he believed the investment style would recover, but that the bank would take a more robust approach when considering the potential downside in strategies that have a wide following.
“What we have to look at more closely is the phenomenon of the crowded trade overwhelming market fundamentals,” Viniar said.. “It makes you reassess how big the extreme moves can be.”
The Wall Street Journal, meanwhile, says Goldman’s move to bail-out its GEO fund amounts to a “bold gamble by one of Wall Street’s most respected names”:
“By drawing attention to its conviction that this is a turning point - and by bringing some heavyweight investors on board - Goldman is betting it can shore up confidence in one of the worst-hit areas of the market and pave the way for a rebound”, the Journal says, also quoting Goldman CFO Viniar saying: “We are investing not because we have to, but because we want to.”
The WSJ also notes some traders’ warnings that it is too early to give an all-clear signal following Goldman’s action:
Investors in market-neutral hedge funds expect steady performance, not the sharp volatility and heavy losses of the past 10 days or so. Some could pull money out in the months ahead, putting new pressure on the funds to sell assets.
In fact, Wednesday is the date some investors can give withdrawal notices to hedge funds, telling them to refund their money by the end of the third quarter, adds the WSJ. “Late Monday, Barclays Global Investors, a huge quantitative money manager based in San Francisco, said it has lost 7 per cent so far this month, despite some gains since Friday.”
And for those who would like to go straight to the source, the Journal has thoughtfully provided a transcript of Monday’s conference call between analysts and Goldman CFO Viniar and some of his team.
