Tuesday, August 07, 2007

Global Alpha meets Beta

Goldman Sachs has a reputation as a firm that knows how to make money. Apparently, they also know how to lose it:

Goldman Sachs Group Inc.'s flagship hedge fund fell 8% during the last week of July, according to Financial News.

The fund is a global macro fund that makes bets on currencies, bonds, and stocks around the world. It has a good long term track record, but the recent past has not been good:

The Goldman Sachs Global Alpha fund posted a 7.7% loss before fees in the week ended July 27, pushing its performance for the year down 12.1% before fees, according to an investor cited in a Financial News report.

The loss increases the fund's run of disappointing returns to more than 18 months, having reported a loss of 6% last year.

The fund gained 40% in 2005 and its annualized return, before fees and is up 15.1% since it was launched in 1995.

So they take a lot of risk and generate 15% per year while also producing loads of volatility. Any strategy that is dependent on the manager's ability to predict the future will have tough stretches and the fact that Goldman Sach's name is on the fund doesn't change that fact. Anyone, no matter how smart, will be wrong sometimes and when you add leverage, being wrong can be very painful.

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