The walls of high finance are spattered with the blood of hedge funds

What is wrong with Global Alpha?

More blood on the walls this Thursday the 13th. First, we learn that Red Kite is back in the doldrums after its near-miss earlier this year. Now another of the hedge fund world’s repeat victims is in the news for having a gory August.

Goldman Sach’s flagship Global Alpha fund lost out last month, as quant funds found themselves squeezed amid the market turbulence, having failed to anticipate the degree of overlap in their models. Bloomberg reports that the notoriously volatile fund lost 22.5 per cent in August, its biggest ever monthly decline, according to an investor update.

Last month’s crisis for quant funds is providing investors with a mixture of hope and despair as August results trickle in, James Mackintosh reported in the FT earlier this week. [Update - we also now see that Mackintosh had the Global Alpha fund down 23 per cent for the month in a story last week.]

Some bounced back after the carnage at the start of the summer. James Simon’s Renaissance recouped the 8.7 per cent loss it suffered in the first eight trading days of the month - when it blamed “partial overlap of portfolios” for losses, after heavy selling of shared stocks.

Not so though it would appear for Goldman. Bloomberg says that the August losses leave the fund down about a third this year and off 44 per cent from its March 2006 peak. The bank also last month moved to shore up its Global Equity Opportunities hedge fund, with a $2bn injection of funds and an additional $1bn from outside investors after it suffered heavy losses in the first few days of August.

When I interned for GS, I fell in love with the idea of Global Alpha. Run by a genius, staffed by top-ranked traders, it had a geek mystique that was beyond description. The returns, by all accounts, were stunning.

Unfortunately, volatility has been a problem. It excelled in 2006, but has fallen off this year. Part of the problem lies in the fact that the traders are given no stop-loss guidelines. Rather, they are merely required to assume a certain degree of volatility. End result? Absurd swings in market value. Time will tell if this is temporary or merely indicative of a larger deficiency in the fund's strategic direction.

Listening to: Kanye West - Flashing Lights