After the Storm, 'Quant' Updates
Barclays Fund Saw
No Broad Exodus;
By CARRICK MOLLENKAMP and IAN MCDONALD
August 13, 2007; Page C2
Quantitative funds, which rely on computer models to make market bets, roiled the markets last week, with several such funds facing losses. Early this week, managers of several high-profile funds will start explaining themselves.
Barclays Global Investors, one of the world's biggest fund managers, with $2 trillion in assets under management, is expected by tomorrow to provide investors its weekly update for its 32 Capital Fund Ltd. The fund's performance has been "challenging," but it hasn't faced large-scale redemption requests from clients or liquidations of its holdings, a person familiar with the fund said.
And Goldman Sachs Group Inc., whose well-known Global Alpha fund has been hard hit, is expected to put out a statement this morning and hold a conference call to walk investors and analysts through some of the losses its "quantitative equity" funds have suffered.
It is all but unheard of for Goldman to hold an unscheduled call with investors, but such calls are starting to occur on Wall Street as trading losses mount. Bear Stearns Cos. recently held one to explain its subprime woes. In recent weeks, Bear was forced to shut two hedge funds with exposure to risky home loans.
Investment banks such as Barclays and Goldman have made big money by aggressively moving into the hedge-fund universe. But as investors in funds that use their names suffer losses, these firms risk broader reputational damage, which is why these updates are critical. The Barclays and Goldman reports will be of interest to two audiences: investors with money in the funds and shareholders worried there may be losses elsewhere in the firms.
The 32 Capital Fund is one of a number of hedge funds housed within Barclays Global, a San Francisco unit of Britain's Barclays PLC. BGI, as the unit is called, is one of the biggest quantitative money managers and is known for prowess at using computers to identify small windows of opportunity to make investment decisions.
The updates from funds such as 32 Capital are of growing interest in the wake of the Thursday stock-market swoon, when the Dow Jones Industrial Average fell 387.18 points, or 2.8%. That drop followed news that French bank BNP Paribas SA halted withdrawals from three investment funds holding securities tied to subprime loans and the European Central Bank had added €94.84 billion ($129.85 billion) in short-term funds to counter a sudden increase in overnight lending rates.
The sudden market shifts have led to jagged results for a number of prominent hedge funds and money managers -- also known as quants -- who use computers and mathematical models to trade.
It isn't clear how 32 Capital performed last week. A person familiar with the fund said there had been improvements Thursday and Friday and that clients hadn't raced for the exits. Lance Berg, a BGI spokesman, said BGI is maintaining its "investment process." "We view this event as liquidity driven, not fundamentally driven," he said.
BGI expanded into hedge funds in recent years after building its name and its portfolio in steadier, though less profitable, exchange-traded funds and index funds.
BGI manages money for the world's largest pension funds. The 32 Capital fund was held in recent years by funds-of-funds or similar client accounts managed by insurers and banks, in addition to some U.S. pension funds. BGI has been growing quickly. Assets at the unit increased to $2 trillion as of June from $1.07 trillion in December 2003, according to BGI.
Barclays's asset-management arm has been a growth driver, as global stock indexes have averaged double-digit-percentage annual gains in the past five years. BGI accounted for about 10%, or £714 million ($1.44 billion), of Barclays's profit before taxes in 2006.
Barclays currently is locked in a bidding contest to buy Dutch bank ABN Amro Holding NV for nearly $100 billion. ABN shareholders are expected to vote on whether to accept Barclays's or a rival offer in October.
BGI is best known for its ETFs -- baskets of securities that trade like a stock on an exchange. About 79% of BGI's assets are index funds or ETFs, which means they mirror broader indexes and generally aren't actively managed. Index funds and ETFs typically charge far lower fees than those on funds where firms actively research and pick securities aiming to beat an index.
Barclays iShares S&P 500 Index fund, for instance, charges 0.09% of assets in fees, compared to a little more than 1.5% of assets for the average U.S. stock mutual fund. Hedge funds, which are investment pools aimed at wealthy investors, typically charge even more -- 2% of assets annually, plus 20% of any profit.
To generate more revenue, Barclays has worked in recent years to build up its actively managed funds like hedge funds. About 21% of BGI's assets are actively managed, some of in hedge funds. A recent report by Sanford C. Bernstein & Co. says BGI has been successful in subtly shifting to the higher fee, actively managed funds. - (note: red emphasis added)
Founded 30 years ago, BGI pioneered index investing in the early 1970s. In 2000, it launched iShares, one of the first ETFs. Barclays's ownership dates to 1995, when it acquired Wells Fargo Nikko Investment Advisors and later renamed it Barclays Global Investors.