Friday, September 14, 2007

WSJ: Goldman Hedge Fund Had Worst Month in August

"For years, Goldman Sachs Group Inc.'s flagship Global Alpha hedge fund could do no wrong. Over the past year, it has been able to do almost nothing right."

"August was the worst month in the fund's 12-year history; it was down 22.7% last month alone, according to a recent letter to investors. So far this year through the end of August, it was down 33.4% due to bad bets on everything from the Australian dollar, the Norwegian stock market and Japanese government bonds. The letter gave no indication about how the fund was faring this month. Over the past 12 months, the fund has lost 37% of its value."

Ouch.

For those who do not know the difference between speculation and investing, this sort of result may provide a useful opportunity for review, as they at least look more like an example of speculation than of investment, and of what happens when speculation goes awry. Money vaporizes, for one thing.

Speculation, per Investopedia, is "The process of selecting investments with higher risk in order to profit from an anticipated price movement." Further... "Speculation should not be considered purely a form of gambling, as speculators do make informed decision before choosing to acquire the additional risks. Additionally, speculation cannot be categorized as a traditional investment because the acquired risk is higher than average." And, reading on, "More sophisticated investors will also use a hedging strategy in combination with their speculative investment in order to limit potential losses."

I would go further, and say that there is not really even such a thing as a "speculative investment". It is sort of an oxymoronic usage. It is a speculation or it is an investment. And the reference to use of "hedging strategy in order to limit potential risks" is a bit ironic, as we're looking at a hedge fund, like many others, which has seem its efforts at risk control overwhelmed by market events.

"Investment", remarkably, is not defined in Investopedia! You might best define "investment" by a reading of chapter 1. of Benjamin Graham's classic work The Intelligent Investor.

I guess you might say the difference is indifference!

Relative indifference to risk, and greater willingness to accept more of it, are characteristic of the speculative, er, speculator. I said relative! Risk is always there, as even Graham would have admitted. There is such a thing as an aggressive investment, and an agressive investor, but the aggressive investor has tied his approach to his goals, and has pretty serious policy controls on the degree of acceptable volatility. A willingness to accept relatively greater levels of risk, with relatively poorer compensation for bearing that risk, or less knowledge of the actual risk taken, is associated with speculative commitments of money. In terms of equities, investors seek more compensation for bearing risk through such things as revenue streams (dividends) and lower prices for access to growth in earnings. A mere hope that the share price will go up or down based on expected short term developments is a speculative approach, for example. For example, using this view of the terms, just about everything I have ever seen Jim Cramer suggest is speculative, not investing.

Bottom line: In what sense is a commitment of money to a hedge fund an investment? If, as has already been said by someone other than me, the 'best and brightest' in the business cannot run a hedge fund without results like this, then who can?

(the story is $ subscription only)
Goldman Hedge Fund Had Worst Month in August - WSJ.com

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