Sept. 13 (Bloomberg) -- Goldman Sachs Group Inc.'s Global Alpha hedge fund fell 22.5 percent in August, its biggest monthly decline, on losses from currency and stock trades.
The fund, managed by Mark Carhart and Raymond Iwanowski, lost a third of its value in 2007, according to an update sent to investors. Investors last month notified New York-based Goldman, the most profitable securities firm, that they plan to withdraw $1.6 billion, or almost a fifth of the fund's assets as of July 31.
Carhart and Iwanowski, who use mathematical formulas to select trades, may get more redemption notices as Global Alpha falls further behind quantitative managers such as James Simons's Renaissance Technologies Corp. Global Alpha generated $700 million in fees after an almost 40 percent gain in 2005. The fund has fallen 44 percent since its March 2006 peak.
``With losses this large, typically you have to look at the return potential going forward,'' said Gregory Dowling, vice president for alternative investments at Cincinnati-based Fund Evaluation Group LLC, which doesn't have money in the Goldman fund. ``If there isn't a possibility of a snap-back, you have to examine where else you can put that capital.''
Goldman injected $2 billion into Global Equity Opportunities, another quant fund run by Carhart and Iwanowski, both 41, after it lost 28 percent in the first eight trading days of August. The fund, which also received $1 billion from outside investors, rose 12 percent in the following week.
Global Alpha's biggest loss in the month stemmed from the managers' decision to sell Japanese yen and buy Australian dollars. The so-called carry trade unraveled when the Australian dollar fell 6 percent against the yen in August. Equities holdings, including stocks in the U.S., Norway and Finland, declined 4.7 percent.
Fundamental Beliefs
``We still hold our fundamental investment beliefs that sound economic investment principles coupled with a disciplined quantitative approach can provide strong uncorrelated returns over time,'' Goldman said in the unsigned report.
Goldman spokeswoman Andrea Raphael declined to comment.
Hedge funds are largely unregulated investment pools that can bet on falling as well as rising asset prices. Their managers gain substantially from profits on money invested.
Global Alpha's decline compares with the 20 percent drop in Red Kite Metals, the world's largest hedge fund dedicated to metals. Old Lane LP, the hedge-fund firm acquired two months ago by Citigroup Inc., lost 5.9 percent in August, quadruple the industry's average decline, as bond and emerging markets fell.
Deep Hole
Global Alpha will have to return 80 percent before the managers can resume collecting 20 percent of investment profits from clients who were in the fund at the beginning of last year.
The fund lost about 9 percent in 2006. At the same time, hedge funds globally gained an average of 13 percent, according to Chicago-based Hedge Fund Research Inc.
Goldman markets the fund, which started in 1995 with $10 million, as making high-risk bets that can lead to swings in performance. It targets a 20 percent annual return, according to fund documents.
Other quant managers fared better in August after a rocky start. Simons's $29 billion Renaissance Institutional Equities Fund made up the entire 8.7 percent loss it suffered in the first eight trading days of August.
Goldman blamed its losses on too many quantitative funds making the same trades, and said in mid-August it would have to develop new strategies.
``Longer term, successful quant managers will have to rely more on unique factors,'' Goldman's fund-management division said in a report to clients. ``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.''
To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net ; Jenny Strasburg in New York at jstrasburg@bloomberg.net