Goldman May Bring Hedge Fund Investing to Masses

Goldman Sachs in not known as a retail outlet for investment products. The firm caters mainly to institutional investors and to the filthy rich. That’s how it made $2.1 billion in the most recent quarter, topping expectations. Now, it appears to be ready to bring hedge fund investing to retail investors. The GS-Art Fund may change Goldman’s image.

According to John Authers writing in the Financial Times, “The new GS-Art Fund will be allowed to put money in a sweeping array of investments – from futures, through swaps and exchange-traded funds to commodity structured notes, equities, and cash. Most intriguingly, Goldman says this investment will be fundamentally passive. Rather than being actively managed, the fund will merely attempt to match the returns of its proprietary Goldman Sachs – Absolute Return Tracker – index.”

For those who make a living analyzing this kind of thing, there are two important components to hedge fund investing. The alpha is the hedge fund manager’s expertise and skill (for that one will still have to pay). The beta is the general movement of markets. As Mr. Authers explains, “Absolute return managers will tend to cluster around similar asset allocations; it is possible to model this behaviour; and hence it is possible passively to capture a large chunk of the value that absolute return managers deliver, and pay much less for it.”

When stocks are off, as they are now, the general public needs alternative investments, and bonds alone aren’t enough. Being able to take advantage of the rising price of oil, rather than being taken advantage of as a result of rising oil prices, makes any portfolio stronger. Denying it to retail investors is simply wrong – if a financial product can be designed to ensure that unsophisticated investors are protected to a degree.

What some investors will have to change is their attitude toward beating the market. Absolute return strategies, which the GS-Art Fund will follow, don’t use the equity markets as a benchmark. Instead, their objective is to outperform cash, to preserve capital under any circumstances. The idea is to have enough capital to take advantage of opportunities when they arise, rather than to lose only 5% when the Dow or S&P are off 10%.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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