Goldman Responds: Fees Slashed, Overcrowding Blamed

Aug 16 2007 | 7:34am ET

If you wondered why such otherwise astute investors, including Hank Greenberg, Eli Broad, hedge fund Perry Capital, and Goldman Sachs itself, would put $3 billion into a Goldman fund that is down 28% this month, here’s a hint: It’s cheap.

Goldman confirmed yesterday that it was eliminating its management fee and halving its performance fee for new investors in its Global Equity Opportunities Fund, which saw its assets fall from $5 billion to $3.6 billion in the first days of August. What’s more, it’s making those terms available to any new investors, as well as new money from existing investors committed by Friday.

The fund had charged a standard 2% management fee and 20% performance fee. In addition to the fee reductions, Goldman is also ditching its high-water mark in favor of a 10% appreciation threshold. In exchange, new investors must accept a six-month lockup.

In addition, Goldman said it would not cut its own $2 billion contribution to the bailout, regardless of how much the new terms helped raise. Earlier, the firm had confirmed a report that it would scale back depending on how much existing investors added.

Meanwhile, Goldman blamed the precipitous drops in three of its quantitative funds—in addition to GEO, its flagship Global Alpha fund and its North American Equity Opportunities Fund suffered steep declines this month—on crowding in the space, echoing an increasingly popular explanation of the quant meltdown. The only answer, it said, is new ideas.

“Longer term, successful quant managers will have to rely more on unique factors,” Goldman wrote in a report to investors. “While we have developed a number of these factors over the last several years, in hindsight we did not put sufficient weight on these relative to more popular quant factors.”

According to the report, all six of Goldman’s quant investment themes—momentum, earnings quality, valuation, profitability, analyst sentiment and management impact—suffered “extreme negative returns” from July 31 through Aug. 10, falling by “unprecedented amounts—far more than at any time in the history of our data.” That figure is estimated around five times greater than any previous declined, adjusted for volatility.

“The magnitude of this move alone argues that fundamental economic news could not be responsible,” Goldman wrote. “Our conclusion is that there was a major supply/demand imbalance caused by many quant managers unwinding simultaneously, which caused outsized negative” returns.

The report also echoed Goldman’s byword about its quant funds: opportunity. The funds have “good investment opportunities in the near term,” it said.

At least one person in high places certainly hopes so. Republican presidential frontrunner Mitt Romney had at least $1 million in GEO, TheStreet.com reports. Due to the way candidate investments are reported—in ranges rather than with precise figures—Romney could be on the hook for much more.

Romney’s investments are held in a blind trust, so the Bain Capital founder and former Massachusetts governor had no control over the investment.


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