September 18, 2012

Goldman’s Quants Court Advisors After Shutting Hedge Fund

Risk-managed Dynamic Allocation Fund sees 8.45% YTD return a year after Goldman shut its Global Alpha quantitative hedge fund

A year after shutting its fallen-star hedge fund and replacing its quantitative investment strategies group head, Goldman Sachs Asset Management is back on track with a successful risk-management fund that targets RIAs as investors.

The Goldman Sachs Dynamic Allocation Fund (GDAFX), which is set to hit the three-year mark this coming January after an early 2010 launch, is a solid contender within Morningstar’s world allocation category, with $1.3 billion in assets, 1.39% in expenses and a year-to-date return of 8.45% as of Monday.

Gary Chropuvka, Goldman Sachs Asset Management “We are a quantitative group, which means that for clients our process is disciplined, systematic and robust. Even by definition of our name, it’s a dynamic allocation fund,” said Gary Chropuvka (left), head of the Global Client Portfolio Management team at Goldman Sachs Asset Management (GSAM). “We combine a highly dedicated group of investment professionals dedicated to asset allocation, about 65 people, many of whom hold Ph.D. degrees in finance and other technical disciplines.”

The Dynamic Allocation Fund is run by Chief Investment Officer William Fallon, one of three CIOs who report directly to the quantitative investment strategies group’s new head, Armen Avanessians. A year ago at this time, Avanessians replaced Katinka Domotorffy, who retired after GSAM shut its Global Alpha hedge fund when investors fled from the fund after its 2007 peak of $12 billion plummeted to about $1 billion last year. In a Sept. 14, 2011 letter announcing the management shake-up to clients, GSAM pointed to Avanessians’ performance at the firm since 1985.

Smooth Ride Overtakes Crown Jewel

Calling the now-shuttered Global Alpha fund “the crown jewel” of Goldman’s quantitative trading business, Reuters in a Sept. 16, 2011 report said the company's decision to liquidate Global Alpha “signals its decision to exit quantitative hedge fund strategies altogether.”

Now, GSAM’s quants are putting a greater focus on providing clients with managed risk and a smoother ride to wealth accumulation. Indeed, during the course of a half-hour phone conversation with AdvisorOne last Friday, Chropuvka used the term “smooth ride” more than a dozen times. Chropuvka, who is responsible for product development and strategy for Avanessians’ team, also said the biggest investments in the Dynamic Allocation Fund have been made largely by financial advisors.

“Registered investment advisors have certainly liked some of the fund’s properties,” Chropuvka said. “Particularly after 2008, investors saw a lot of these ‘60/40’ balanced portfolios really not meet what their expectations were, which at the time they viewed as a smooth ride to wealth accumulation. But when equity markets are down 50%, it’s difficult to justify that as a smooth ride to wealth accumulation.”

Managed Volatility

"A lot of the Dynamic Allocation Fund’s buyers are people who want to believe in diversification of a portfolio,” Chropuvka added. “They like their volatility being managed. … Investment advisors particularly have really thought highly of this fund as we have set out to provide that smoother ride, and over the last two and a half years we have been quite successful  in continuing to provide clients with a smoother ride to overall wealth accumulation.”

The fund’s risk-managed approach involves two components: the “intelligent offense,” which seeks to attract returns, and the “dynamic defense,” designed to stabilize volatility in an effort to preserve and grow investor capital.

“We try to avoid large market swings,” Chropuvka said. “When we look back at the events of the last few years, they’re quite instructive. In 2008, when some equity portfolios were down 50%, the math was quite challenging to battle back from large drawdowns.”

Like many of the increasingly popular “go-anywhere” funds that strive to balance volatility by moving into and out of markets quickly, the Dynamic Allocation Fund is invested in a mix of global equities, bonds, credit, commodities and TIPS. The fund also leverages U.S. Treasuries to create a more diversified portfolio relative to the S&P 500.

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