“Smoking your own product.”
That's how one hedge fund manager referred to the announcement that Goldman Sachs had invested $2 billion on its own money into it’s Global Equity Opportunities fund.
“You can look at it as a testament to the quality of the product,” he said. “Or you can just say that maybe they’ve become addicts or can’t find other buyers for the stuff.”
During a conference call following the announcement that GEO was taking $3 billion of new money—$2 billion from Goldman and another $1 billion from friends—Goldman denied that this amounted to a “rescue” of the fund. It was an “opportunity.”
But lots of people are calling it a rescue regardless. And some are wondering why GEO needed to be rescued more than other Goldman operated quant funds that are also said to have been in trouble.
But if you read between the lines in the transcript to Monday’s conference call, you can see one reason that GEO needed a bailout: it had gone way beyond its leverage parameters. According to Goldman Sachs CFO David Viniar, Goldman had to investors to expect that GEO would be a little bit more than 3.5 times leverage. But before the injection of new cash, GEO was around six times levered.
In an analysis piece on Reuters today, Jonathan Keehner pins GEO’s troubles squarely on the leverage donkey. “The strategy of using debt like a steroid to boost returns on investments came back to haunt” hedge funds like GEO, Keehner writes.
The way Goldman disclosed this level of its leverage seems to suggest that it realizes the fund had levered up way too far. “Note how Viniar tried to downplay the leverage in the Not-Being-Rescued fund, and actually understated it by half before [Credit Suisse’s Susan] Katzke forced him to cough up the truer picture of just how much trouble the ‘quants’ had gotten into, when the gamma of their beta lost its alpha,” Jeff Matthews writes on his blog today.
How a Goldman hedge fund shrank a third in a week [Reuters]
When the Gamma of the Beta Begins to Lose its Alpha [Jeff Matthews Is Not Making This Up]
Posted by Mimi , Aug 15, 2007 2:27PM
To mention but a few errors...
"That's how once hedge fund manager referred to the announcement" - should be "one"
"Goldman had to investors to expect that GEO would be a little bit more than 3.5 times leverage" - what?
"Goldman denied that this amount to a “rescue” of the fund" - amounted to?
John Carney - you strike me as a man in desperate need of a proofreader and I may be the woman to help you. What do you say??
Posted by Random Banker , Aug 15, 2007 2:28PM
John:
There are two ways to lever up. Thous its possible GEO borrowed more and more to try take advantage of what it thought was mispricing in the markets. However, it more likely that their debt level remained the same but the value of the equity debt going down. The latter method of increasing leverage is probably a bigger problem to the extent that their models still being shot against and they are not intentionally levering up but just losing money faster they can cover their positions.
Posted by anon , Aug 15, 2007 2:39PM
RB= "King of Fuckin Conjecture"
Posted by chris , Aug 15, 2007 2:48PM
RB's comment seems pretty solid. See a good article at:
http://www.bis.org/events/brunnen07/shinpap.pdf
Posted by John Carney , Aug 15, 2007 2:56PM
Mimi, send me your resume.
Posted by anon , Aug 15, 2007 3:04PM
Quick call the Margin Desk, let them know that if prices fall leverage increases and they may want to ask for more collateral!!
Thanks for the insight Nostradamus.
Posted by Random Banker , Aug 15, 2007 3:19PM
Anon: You're missing my point. If you can't post any collateral they normally they would sell off your positions, it would suck but it wouldn't be the end of the world. But if your whole trading technique gos haywire your positions don't even cover the notional value of your margin. You get new equity infused and everything is fine.... but if you're still trading in the same manner this reduction in leverage is only temporary.
That's very different than someone who is intentionally putting on huge amounts of leverage and can stop at any time they chose.
Posted by John Carney , Aug 15, 2007 3:26PM
RB,
I think that's a good point. And very possible. So new equity injection would have been to fend off new margin calls.
If so, it looks even more like a "rescue" than it did before.
Posted by Chris , Aug 15, 2007 3:26PM
Not so fast, Mimi. You left out a comma separating independent clauses. Your sentence should read: "John Carney - you strike me as a man in desperate need of a proofreader[,] and I may be the woman to help you."
John, would you like a proofreader for your proofreader? ;o)
Posted by Chris , Aug 15, 2007 3:28PM
Not so fast, Mimi. You left out a comma between independent clauses. Your sentence should read: "John Carney - you strike me as a man in desperate need of a proofreader[,] and I may be the woman to help you."
John, would you like a proofreader for your proofreader? ;o)
Posted by , Aug 15, 2007 3:45PM
no way, you don't need a comma there with the word and. remove and and you could insert a semicolon. a comma isn't really necessary either way. (may I be the proofreader's proofreader's proofreader?)
Posted by Other Chris , Aug 15, 2007 3:59PM
Quid custodiet ipsos custodes?
Okay, we can all be right:
Use a comma + a little conjunction (and, but, for, nor, yet, or, so) to connect two independent clauses, as in "He hit the ball well, but he ran toward third base."
Contending that the coordinating conjunction is adequate separation, some writers will leave out the comma in a sentence with short, balanced independent clauses (such as we see in the example just given). If there is ever any doubt, however, use the comma, as it is always correct in this situation.
Sorry, Mimi!
Posted by get a life , Aug 15, 2007 4:02PM
who gives a fuck
Posted by Eats shoots & leaves , Aug 15, 2007 4:06PM
Oh come on! "who gives a fuck ?"
Posted by , Aug 15, 2007 4:06PM
A few of my remaining braincells just died.
Posted by lifeless , Aug 15, 2007 4:07PM
i do
Posted by , Aug 15, 2007 4:15PM
until the last moment we won't acknowledge what is actually going on. where does that all come from? subprime meltdown? no. credit crunch? no. quant hedge funds collapse? no. why did the roman empire collapse?
Posted by Quit diagramming sentences , Aug 15, 2007 4:17PM
Of course it was bail out. Are you fucking high on crack cocaine?
Posted by jt , Aug 15, 2007 4:18PM
May I be the one who delivers a swift kick to the groin to all the proofreading nitpicking fools in the audience?
Posted by , Aug 15, 2007 4:19PM
i'd return the favor but there's not much worth kicking down there is there?
Posted by get a life , Aug 15, 2007 4:42PM
i guess this is what one should expect when you have a bunch of english majors finally getting a chance to put their useless degrees to work
Posted by quant , Aug 15, 2007 9:06PM
Use of a comma after the word "and" is common practice in Commonwealth countries but is not required in American English.
Posted by de Cosmos , Aug 15, 2007 10:38PM
HaHa! So, how many poofreaders does one need?
Posted by re: @ de Cosmos , Aug 15, 2007 11:13PM
Seems we'll need some quants to figure that out first right?
Posted by John Carney , Aug 15, 2007 11:44PM
This is my favorite comment thread ever.
Those of you really concerned about errors on DealBreaker should consider emailing us at tips@dealbreaker.com. Those of you who enjoy displaying your copy-editor prowess should continue to do so. Either way helps us put out a better product.
Thanks!
Posted by tinbox , Aug 16, 2007 12:23AM
I can't believe the three hall-of-fame investors would put a single dollar into a fund that is so clearly broken. At least not on any normal terms (even with a discount fee structure).
On the comma controversy, let a thousand flowers bloom. Mimi's sentence would be clearer with the comma, but she would lose the chatty, blogger tone that she established with the dash after "John Carney," and furthered with the final double question marks.
Posted by tinbox , Aug 16, 2007 12:24AM
I can't believe the three hall-of-fame investors would put a single dollar into a fund that is so clearly broken. At least not on any normal terms (even with a discount fee structure).
On the comma controversy, let a thousand flowers bloom. Mimi's sentence would be clearer with the comma, but she would lose the chatty, blogger tone that she established with the dash after "John Carney," and furthered with the final double question marks.