Some Thoughts On The Demise of Goldman Sachs’ “Global Alpha”
I read an article that Goldman Sachs’ flagship “Global Alpha” fund http://www.cnbc.com/id/44545789 was closed today following some hefty losses this year. To many it is a dark day for quantitative trading/investing when the so-called “best and brightest” are hanging up their gloves. I wouldn’t read too much into this because Goldman likely saves its best and brightest for trading its own money instead of for clients. On that note, there is a whiff of fumes from a statement by GS that revealed ” potential liabilities” to now bankrupt Lehman Brothers. With respect to their claims against Lehman they wrote: “we cannot predict when the fund will be able to make final distributions, if any, to investors in the fund.”To me this raises questions as to whether the fund served merely as a vehicle to engage in shady and unfair dealings with its own trading desks. Perhaps that is why Blankenfein recently took the unusual step for a CEO to hire a personal lawyer?
Furthermore to say that the Global Alpha fund was a high-speed computerized fund is a complete misnomer. Such behemoth hedge funds that trade for outside investors almost always run strategies that appear somewhat “conventional” (tactical asset allocation, buying undervalued securities, engaging in complicated over the counter derivative and fixed income strategies) and have modest turnover that is enhanced high speed execution. In contrast, the strategies run internally are almost certainly higher frequency and built on tremendous structural edges gained from trading for and on behalf of clients. To me, the closure of “Global Alpha” highlights several points: 1) the markets are in the midst of tremendous global financial mess where conventional historical relationships have been severely disrupted by highly unpredictable movements in different assets—this was probably one of the reasons why Goldman had trouble especially since it is trading the Global Alpha with a lower frequency of trading 2) it is no longer desirable for economic and practical reasons to trade scalable quantitative strategies on behalf of investors— their capital is not truly required for a firm like Goldman and investors are disruptive by exposing them to greater legal risk and unwanted transparency 3) the best talent (aside from the internal GS trading group) is rapidly shifting to proprietary trading and high-frequency firms where it is most beneficial.
Things are changing in the investment industry, and something tells me that this is a historic event that many will point to in the future as a turning point. The jury is still out yet as to what these changes will be, but my intuition suggests that we are entering a new and different era for investment management. True “alpha” is quickly becoming a privatized business.