Rough ride

April 1, 2009

The worst financial crisis in 80 years has tarnished many previously sparkling reputations.

rtr14aq2In fund management, as in banking, many managers who previously looked like the shrewdest around were left looking like investors who could profit well enough in a bull market, or even during the dotcom bust, but just couldn’t deliver the goods when times got really tough.

Yesterday Goldman Sachs said the two heads of its once-flagship Global Alpha quant hedge fund had resigned.

After a decade of strong performance and asset growth, the fund lost money on bad bets in 2006 and the extreme market volatility of late summer 2007 after the onset of the subprime crisis, when many computer-driven funds were caught up in a vicious circle of selling.

Having briefly been the world’s biggest hedge fund manager, Goldman Sachs was hit by a wave of redemptions that saw Global Alpha shrink by around 80 percent between its 2007 peak and the end of 2008.

It is interesting to ponder whether many managers, in hedge funds or in banking, would now have their reputations firmly intact if the credit crisis had not happened.

But then again, was it ever going to be possible to have such a long period of low volatility and rising asset prices — the perfect combination for hedge funds and banks to make money – without the ensuing current crisis?

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