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Goldman: Deal or No Deal?


In essence, Goldman is only willing to fund its own hedge fund to the extent that it cannot find other investors willing to do so.


MSNBC is reporting that Goldman Sachs (GS) cut fees to save its fund. The key points:

  • Goldman injected $3 bln into its troubled hedge fund.

  • Goldman waived its annual management fee for new investors.

  • Goldman's "quant fund" lost more than 30% of its value in a few days.

  • Existing investors who want to put new capital into the fund will be able to do so on the same terms as the new investors.

  • For reasons that are unclear, at the beginning of last week, shares began to move in opposite ways to those predicted by the models.

Make sure to read this full article as it is pertinent and important.

Unclear Reasons

For more on "reasons that are unclear," please see Don't Worry - It's Just Nerves.

Deflation in Fees

Can it be? Why, yes it is, right there in black and white: Not only were assets under management fees 100% waved but the 20% of profits' fees were reduced to 10%.

Goldman "graciously" offered these same terms to existing investors who are now down 30% in spite of the fact that the Dow and Nasdaq are still quite ahead on the year.

A key idea in the MSNBC story is that "Goldman will scale back its own contribution according to the amount of commitments it attracts from existing investors." In essence, Goldman is only willing to fund its own hedge fund to the extent that it cannot find other investors willing to do so.

In an effort to attract future investors, Goldman is willing to waive fees on new accounts, essentially telling past investors now underwater by as much as 30% where to go. Why shouldn't the existing investors vote with their feet? And exactly what is it about this quant fund that should remotely attract anyone? (For more on quant funds, please see Genius Fails Again.)

Sorry Goldman, the game is up. Half-baked measures will no longer do. People shouldn't be willing to pay 20% (now 10%) of profits plus a 2% management fee (now 0%) to a fund that is down two consecutive years and 30% in a flash. Is the greater fool's game over or not? I guess we soon find out.

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