Monday, December 17, 2007

Goldman May Break Record With $10 Billion Hedge Fund (Update1)

By Katherine Burton and Christine Harper

Dec. 17 (Bloomberg) -- Goldman Sachs Group Inc. may start its newest stock hedge fund with as much as $10 billion in what would be the biggest debut in the industry's history, two people with knowledge of the fund said.

Goldman Sachs Investment Partners, set to open Jan. 1, is being run by traders who previously worked on the New York-based company's proprietary equity desk. They are led by Raanan Agus, 40, who had been head of the bank's principal strategies group since 2003, and Kenneth Eberts, 41, who had been in charge of U.S. investments since 2003.

The equity trading group, once overseen by former U.S. Treasury Secretary Robert Rubin, has spawned at least six multibillion-dollar hedge funds, including those managed by Richard Perry, Daniel Och and Eric Mindich. They all left Goldman to start their own firms. This time the traders are staying at Goldman, moving to its asset-management group.

``It's a first for Goldman to offer an in-house fund'' to keep talented people, said Jeff Tarrant, chief investment officer of New York-based Protege Partners LLC, which farms out money to hedge funds.

If Goldman starts the fund with $10 billion, it would surpass the record set last year by Michael McCaffery, former head of Stanford University's endowment, who started his Menlo Park, California-based Makena Capital Management LLC with $7 billion. The firm typically raises money from wealthy investors and institutions such as pension funds and insurers.

Slowdown Among Startups

Andrea Raphael, a Goldman spokeswoman, declined to comment. The people familiar with the fund asked not to be named because it's private.

In the first half of 2007, hedge funds opened at the slowest pace since 2003, and almost all of the $164 billion went to new offerings from managers with proven track records, according to data compiled by Chicago-based Hedge Fund Research Inc. Investors have been spooked by the worst decline in non- government debt markets since Russia defaulted in 1998.

The credit-market turmoil led to losses at some of Goldman's largest hedge funds. Goldman's Global Alpha fund, which started 2007 with more than $10 billion in assets, fell 37 percent through Nov. 30. Its Global Equity Opportunities fund dropped 23 percent in August, and the company and a group of outside investors shored up the fund with $3 billion in new cash.

Losses in the two quantitative funds, which use computer models to make investment decisions, contributed to an 83 percent drop in performance-related fees at the bank.

Selling Goldman Brand

Goldman is selling the new fund on a proven track record and the team's ability to ``leverage the Goldman Sachs brand to source and access investments,'' according to a marketing document obtained by Bloomberg.

The company calculates that if the current fund, which will use borrowed money to double the assets under management, had operated since the beginning of 2004, it would have returned 18 percent a year on average through August 2007. That compares with the gain of about 10 percent for the Standard & Poor's 500 Index and about 12 percent for the CSFB/Tremont index of long- short equity funds.

The fund will start with more than 40 investment professionals from Goldman's proprietary trading group. About 75 percent of the fund will concentrate on shares they expect to rise and those they expect to fall, with another 5 percent dedicated to companies going through mergers or other corporate events, the marketing documents said.

Side-Pocket Included

An additional 10 percent will be slated for investment in corporate credit and 10 percent in private equity or other assets that aren't easily traded.

Between a half and three-quarters of the assets will be in the U.S. Another 10 percent to 30 percent will be focused on Asia. Illiquid investments will be placed in a side-pocket, meaning investors won't be able to get their money out until the positions are sold.

Goldman will put an undisclosed amount of its own money into the fund and pay the same fees as outside investors, which are 2 percent of assets under management and 20 percent of returns. Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

The new fund is part of Goldman Chief Executive Officer Lloyd Blankfein's plan to expand the firm's wealth-management business in order to win more customers.

``Given our brand, our footprint, our reputation for success in investing overall, I think our private wealth- management footprint is smaller than it should be,'' he told investors at a Merrill Lynch & Co. investor conference in November.

Goldman opened Liberty Harbor, a $2.7 billion credit hedge fund, and GS Liquidity Partners, a $1.8 billion distressed fund, earlier this year.

Goldman Sachs Asset Management now has $800 billion in client assets, including about $33 billion in hedge funds as of Sept. 30, according to data compiled by Bloomberg News.

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