Global Alpha Learns From its Rookie Mistakes

The quantitative strategies at Goldman Sachs Asset Management, which were roundly mocked less than a year ago, are back, kinda, sorta:

Goldman Sachs Group Inc.'s Global Alpha hedge fund has gained 19 percent this year after a plunge of almost twice that amount in 2007, said three people with knowledge of its performance.

The rebound through mid-June reflects improved returns for quantitative funds, which rely on computers to select trades, after investors rushed to exit similar strategies last year during the credit crunch. Goldman's Global Equities Opportunities Fund, which required a $3 billion cash infusion last year, has gained about 7 percent, said the people, who declined to be identified because the returns are confidential. Bloomberg

Of course, with Global Alpha's assets under management down from $12 billion to $2.5 billion, it is hardly a win. But the rocket scientists in Goldman's quant department, led by Rober Litterman, have learned a few lessons about crowded trades, and will be keeping a closer eye on the shareholder lists of their positions in an attempt to keep lightning from striking twice:

Litterman said he had missed signs of the proliferation of common quant trading strategies. One was spotting a book on the topic in a bookstore in Malaysia. Another was realizing the interest in Goldman's own funds showed investors were pouring capital into the investment style, including through so-called multistrategy funds, he said.

All the quants owned the same stocks a year ago, and the strategies were far too similar to each other. And belatedly, Liitterman had his "Eureka" moment:

``It was like turning a light on in a dark room to see the amount of crowdedness,’’ Litterman said. ``We were less attuned to it because we didn’t think of it as a trade, we thought of it as a business.’’

Hey Bob, nice to see you pick up on one of the golden rules for running money. Lets hope your prop traders are a little more on the ball, given you are handing it to them:

Goldman now uses proprietary trading ideas for about 35 percent of its positions, compared with 5 percent last August, when funds with similar trades rushed to unwind them in what Litterman called a ``de-leveraging explosion.’’

Shoveling money indiscriminately at hot strategies usually ends badly, but the quants at Goldman were asleep at the wheel. It is remarkable how clueless they were, and that is a fact.

A book in Malaysia?  DOH!

Good luck with that high water mark, guys. And thanks for the laugh.

Maybe GSAM can start charging fees again.

Goldman’s Global Alpha Gains 19% After 2007 Plunge
Bloomberg

August 15, 2007
Goldman Revolutionizes Hedge Fund Fee Structures
1440 Wall Street
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