If Goldman won’t invest, trouble may be ahead

You may recall that recently Goldman Sachs injected $1bn of funds into one of its’ funds following a dramatic fall in value during the August downturn. In the couple of weeks thereafter the fund went up 20% – very nice too, thank you.

However, another Goldman fund appears to be less attractive to the firm

Report: No Goldman fund bailout
Wed, 19 Sep 2007, 12:18
CNNMoney

Goldman Sachs Group won’t bail out its embattled flagship Global Alpha hedge fund, but it won’t close the fund either, according to a published report. The Wall Street Journal reports that the fund managers have sent a letter to investors with promises to better handle borrowing and volatility, to shrink the size of the fund and to “adjust our process.” The letter did not say there would be any injecting of Goldman’s own money into the fund, according to the report.

Never one to miss a money making opportunity (unless there is a bigger one elsewhere), what should we infer from this one? I had a brief conversation with a friend at a Swiss Private Bank and he advance the notion that the big banks are concerned about setting a precedent of bailing out their funds when they hit problems since this removes moral hazard from investors.

I disagreed with him since Goldman’s “bail out” was at prevailing prices rather than pre-crash. Hence, investors had already lost money and weren’t being refunded. Instead they were simply benefiting from the firm providing additional liquidity to snap up opportunities in the market, which all fund investors then benefited from.

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