Why a Goldman Sachs Hedge Fund Investment Might Look Attractive

Aug.14.07 | About: Goldman Sachs (GS)

Commenter tinbox has an interesting take on the news that Goldman Sachs (NYSE:GS) 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 up.

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.