Business Insight Zone

Answer: probably not. Nonetheless, the financial press has been atwitter about Goldman Sachs’s $3 billion bailout of its Global Equity Opportunities hedge fund. The bailout is embarrassing enough. The fact that the mighty Goldman ponied up $2 billion of its own money to carry it off? Shocking.

Although it’s better known for its traditional investment banking businesses, Goldman has gotten into hedge funds in a big way, to the tune of $150 billion in hedge-fund assets under management. The big bank has a number of prominent “quantitative” funds, which use fancy computer models to rack up gains on market movements, even tiny, temporary ones, that the human eye could never track.

Which is great when it works. This Financial Times column has a nice assessment of what went wrong with GEO and similar quantitative funds over the past few weeks:

For reasons that are still unclear, shares began to move in ways that were the opposite of those predicted by computer models. These moves triggered selling by the funds as they attempted to cover their losses and meet margin calls from banks. This in turn exacerbated the share price movements.

In other words, it wasn’t just anecdotal impressions indicating that markets were swinging around wildly — it was a quantitative fact.

Fortunately for Goldman, it has deep pockets and connections to big investors (who ventured the other $1 billion for the GEO bailout). No doubt in the long run the bank will continue to make lots of money. But its most recent move shows just how hairy the short run is these days.

Category: Economics, Finance & Real Estate