The Goldman Sachs Group's (NYSE: GS) Global Alpha Hedge Fund has lost 3.4% of its value so far in 2007, according to Bloomberg News.
It sure sounds smart to use Greek letters in the name of your hedge fund. Those who have taken basic finance know that the Greek letter Beta refers to the extent to which an investment's return varies with the market's rate of return; whereas Alpha denotes returns in excess of the market rate. That -- and the dual meaning of Alpha as the top dog -- is why the hedge fund industry's leading magazine is called Alpha.
But Goldman's Global Alpha should be renamed Global Negative Alpha because it underperformed both its benchmark index -- the London Interbank Offer Rate (LIBOR) and the average hedge fund. In particular, Global Alpha lost 3.4%, LIBOR was positive 5.49% and the average hedge fund rose 4.9%.
If there's any good news here, it's Global Alpha's managers will get only 1.5% of the $10 billion worth of assets and they won't get any of their 20% incentive fee on the returns above LIBOR because there aren't any.
Why is Global Alpha losing money? That is a hard question to answer because computers make its investment decisions and the computers aren't talking. But based on the managers' explanation it appears there are two reasons:
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Bad currency wagers. Global Alpha bet wrong that the Canadian dollar and Norwegian krone would decline. But the Canadian dollar gained 4% against the U.S. dollar in April, and the krone gained 2%.
- Bad "market neutral" bets. Global Alpha's returns also were hurt by market- neutral investments -- attempts to generate consistent gains regardless of whether prices rise or fall -- in fixed-income and equity markets. GS reported that its U.S. equity market-neutral strategy "detracted from performance as our earnings quality and valuation themes performed poorly."
I don't mean to be obnoxious, but my Coast Financial Holdings (NASDAQ: CFHI) call would have made investors 184% in seven weeks -- that's what I call Alpha! If any of those investors in Global Negative Alpha want real Alpha, they know where to find me ; )
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.
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