Goldman: Deal or No Deal?

MSNBC is reporting Goldman cuts fees to save fund.

Investors who helped Goldman Sachs inject $3bn into its troubled hedge fund this week were lured with substantially lower fees than those typically charged by the Wall Street bank.

Goldman on Tuesday night said it had agreed to waive its annual management fee for the investors, who contributed $1bn in new capital to the fund. The investors will pay a performance fee of just 10 per cent on any profits the fund makes once it has achieved a 10 per cent return.

The fees, much lower than those usually charged by Goldman and other hedge fund managers, show the extent to which the bank was forced to drop its demands to attract outside capital to its Global Equities Opportunity fund. Goldman, which will inject up to $2bn into the fund, will be subject to the same fee structure as the new investors.

Goldman will scale back its own contribution according to the amount of commitments it attracts from existing investors.

The GEO fund is one of several run by the bank that used quantitative strategies to spot valuation anomalies. For reasons that are unclear, at the beginning of last week shares began to move in opposite ways to those predicted by the models. This triggered selling as the funds tried to meet margin calls, which exacerbated the price movements.

Key Story Ideas

• Goldman Sachs injects $3bn into its troubled hedge fund
• Goldman waives its annual management fee for new investors
• Goldman's "quant fund" lost more than 30 per cent of its value in a few days
• Existing investors who wanted to put new capital into the fund would be able to do so on the same terms as the new investors
• For reasons that are unclear, at the beginning of last week shares began to move in opposite ways to those predicted by the models

Unclear Reasons

For more on "unclear reasons" please see Don't Worry - It's Just Nerves.

Deflation in Fees

Can it be? Why yes it is! It's right there in black and white: Not only were assets under management fees 100% waved but the 20% of profits fee were reduced to 10%.

Goldman "graciously" offered these same terms to existing investors who are now down 30% in spite of the fact that the Dow and Nasdaq are still quite ahead on the year.

A key idea in the story is that "Goldman will scale back its own contribution according to the amount of commitments it attracts from existing investors." In essence Goldman is only willing to fund its own hedge fund to the extent that it cannot find other investors willing to do so.

In an effort to attract future investors, Goldman is willing to waive fees on new accounts, essentially telling past investors now underwater by as much as 30% where to go. Why shouldn't the existing investors vote with their feet? And exactly what is it about this quant fund that should remotely attract anyone? For more on quant funds please see Genius Fails Again.

Sorry Goldman, but the game may be over. People shouldn't be willing to pay 20% (now 10%) of profits plus a 2% management fee (now 0%) to a fund that is down two consecutive years and 30% in a flash with most major markets ahead in that timeframe. But is it "Deal" or "No Deal"? Will Goldman's ploy stop the redemptions? I guess we will soon find out.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/