When diversification isn’t
Goldman Sachs created a $10MM hedge fund in 1995 that grew to be $10 billion over a decade as a “multi-strategy fund”. The fund was down 23% in August. WSJ:
Global Alpha’s dismal record this year is especially startling because it is a “multi-strategy fund” and can engage in an array of strategies. In theory this should give it the flexibility to adapt to volatile and difficult markets and avoid problems arising from any single strategy. But over the past year practically everything Global Alpha touched went wrong. The problems show how one of the key dangers that have tripped up hedge funds in the current turmoil are strategies touted as unique but which channeled funds into very similar investments. Everyone got hurt when the investments wound up needing to be sold all at once. One investor in the fund described the losses as “shocking” that they could have lost money “across so many different strategies.”
“strategies touted as unique but which channeled funds into very similar investments. Everyone got hurt when the investments wound up needing to be sold all at once.” It is not a unique strategy, let alone evidence of diversification of strategies, to run for the exit in a crowded room at precisely the same moment as everyone else.