Why a Goldman Sachs Hedge Fund Investment Might Look Attractive

Commenter tinbox has an

interesting take on the news that Goldman Sachs is injecting liquidity into

its own hedge funds:

It’s wildly implausible that anyone looked at Goldman’s fund and suddenly

decided it is the best investment opportunity on the planet. That simply didn’t

happen. Funds down 15%+ do not attract new investors for a whole variety of

reasons and this self-serving announcement addresses none of them.

Well, there’s at least one good reason why a fund down 15%+ should address

new investors, and it’s called the high-water

mark. If you think that hedge funds are a good investment, you think that

they’re a good investment after they’ve taken out their 20%-of-the-profits

performance fee. Which means that they’re a really good investment

if you don’t have to pay that fee for the first 35% that your investment goes


If the Goldman funds are down 26% from their high-water mark, then they will

have to rise more than 35% from their present levels just to get back to it

and start earning performance fees again. Which makes investments in these funds

some of the cheapest hedge-fund investments available right now.

I reckon there’s a very good chance that the $3 billion of liquidity being

injected into Goldman’s funds won’t pay any performance fees unless and until

those funds reach their high-water mark. If that’s the case, I imagine that

quite a few hedge-fund investors would be extremely interested in buying cheap

exposure to what has historically been a very high-performance fund.

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