As the difficulties in the mortgage markets have spilled over to create broader problems for various hedge funds, Goldman Sachs formally disclosed this morning that it has seen three of its hedge funds run into difficulty. In response, the investment bank said that it and a cadre of investors would put up $3 billion to help one of the ailing funds known as the Global Equity Opportunities Fund:
… Goldman Sachs and various investors, including C.V. Starr & Co., Inc., Perry Capital LLC and Eli Broad, are making a $3 billion equity investment in GEO. We consider this an attractive investment opportunity. Existing investors in the fund will also have the opportunity to participate. The investment will also provide the fund with more flexibility to take advantage of the opportunities we believe exist in current market conditions.
The fund had a net asset value of approximately $3.6 billion before the equity investment, Goldman Sachs said, citing “market dislocation” as the core driver behind the fund’s poor recent performance. The report of the losses at the fund comes after news earlier last week that Goldman’s $8 billion Global Alpha fund had dropped 26 percent this year as its quantitative models failed to keep pace with market changes. Goldman, while acknowledging that its funds are under pressure, said it its press statement that it believes “current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals.” As a result, the investment bank said it will actively pursue what it characterized as “market opportunities” in an effort to buttress future returns at the three funds in question. My thoughts here are simple: this move will either prove to be a stroke of genius, or a real-life example of how to quickly turn a foxhole into a grave.