Active Investor

Memo from the 99% to Goldman: Keep Your Hedge Funds!

Active Investor

While scanning my Google Alerts on investment-related articles, Antoine Gara’s Goldman Offers Hedge Funds to the 99% grabbed my attention. The article describes Goldman Sachs' newly offered Multi-Manager Alternatives Fund (GMAMX).

With more than a hint of cynicism, Gara states, “[GMAMX] will give ordinary investors the ability to put their savings and retirements in Wall Street's riskiest products such as convertible bonds, junk bonds, bank loans, mortgage backed securities, credit default swaps, structured products, swaptions, total return swaps, swaps on futures, variance swaps and contracts for difference, among other arcane financial instruments.” The fund will be open to investors with as little as $1,000, but annual fees will be as high as 3.3%. Lucky them!

Goldman’s press release announcing the fund proclaims, “Many individual investors’ portfolios and retirement accounts underweight alternatives, relative to their institutional counterparts.” And this is a problem — why? Gara further articulates his well-founded cynicism: “It remains to be seen, however, whether 401(k) accounts need exposure to hedge funds and Wall Street trading.”

 As IFA has noted in many different places such as here, the performance of hedge funds as a group has been deplorable. According to Simon Lack, author of The Hedge Fund Mirage, the bulk of the profits earned has gone to the operators of the hedge funds rather than the investors who took all the risk. In perhaps the cruelest of all investing ironies, hedge fund investors as a group would have been better off if they had simply invested in Treasury bills, the quintessential risk-free investment.

While some may credit good intentions to the genius at Goldman who proffered the notion of hedge funds availability to the general public, I for one, cannot easily dismiss Goldman’s past shenanigans that handily took advantage of retail investors. Remember Fabrice Tourre (aka “The Fabulous Fab”)? He’s the one who boasted in e-mails about selling “Frankenstein” derivative products to widows and orphans. And, just last year, we were granted an insider’s view into that “toxic and destructive” culture that is Goldman when executive director Greg Smith tendered his resignation.

To conclude, If Goldman truly wishes to serve 99% of the investing public, they should scrap their alternatives fund and opt to offer low-cost index funds. I, for one, will not be holding my breath.