In the early 1990s, a director in the asset management division at Goldman Sachs approached Clifford Asness (above), a trader of mortgage-backed securities in his late 20s, with a proposal: Would he like to run Goldman’s new quantitative research desk?
Quantitative research is the use of computer models to analyze markets, an idea Asness had been entranced with ever since he worked with professors at the Wharton School coding computer programs to test economic and financial theories. He took the job, hired two friends and began developing models to evaluate risk in currencies, bonds and entire economies.
In 1995, he persuaded a few partners at Goldman to front him cash for an internal hedge fund to employ these models in the market. Asness quickly turned the initial US$10-million investment into $100 million, prompting Goldman to open the fund to the public. The pitch: “You get the Goldman secret sauce with this smart team.”
The fund, Global Alpha, became a Wall Street sensation. It returned 111% in 1996, and 42% in 1997. By the end of that year, the team managed $7 billion. The investing strategy was known as “market neutral,” meaning it generated money regardless of what happened in the markets. For instance, the computer model could identify cheap stocks gaining momentum, as well as growth stocks that were slowing. The team at Global Alpha bought the cheap stocks and shorted the growth stocks, maintaining a perfect balance between the two.
Global Alpha’s success marked a new era for hedge funds and proved that sophisticated computer models could consistently beat the market. Funds that use these techniques are known as quant funds, and they proliferated after Global Alpha launched. Math geniuses became coveted on Wall Street—not testosterone-fuelled traders. Some quant funds relied exclusively on computers with minimal human intervention.
Asness left to start his own hedge fund in 1998, but Global Alpha continued to be a juggernaut in his absence, eventually managing $11 billion in assets. By 2006, the growth of Global Alpha turned the asset management division at Goldman Sachs into the world’s largest hedge fund manager. The fund took on a mystique in the media, with The Wall Street Journal calling it a “big, secretive hedge fund” and gushing that its returns were “sizzling.”
Those returns stopped in 2007 when Global Alpha plunged 40%. Its seemingly flawless computer model was unable to contend with the bizarre market movements that year, which contained early rumblings of the financial crisis. Investors demanded redemptions even as Global Alpha recovered slightly the following two years. The fund managed only $1 billion as of mid-2011, and returns had fallen 12% since January.
On Sept. 14, Goldman sent a letter to the fund’s remaining investors. “We would like to notify you that we have determined to close Goldman Sachs Global Alpha Fund,” it read. The fund will be dissolved by the end of October. The head of quantitative investment strategies announced his retirement at the same time, prompting speculation that Goldman is abandoning entirely the quant hedge fund strategies that had once been so profitable.