Leverage Lurking Behind The Goldman BailoutGlobal Equities Fund Was Way Living Beyond Its Means

Publish date:

“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]