Wednesday, March 26, 2008

Goldman Sachs Asset Management Business History


In May 1989, Goldman Sachs entered asset management business under the leadership of Leon G. Cooperman.

The move was a significant shift for Goldman as it had stayed out of equity management till that time because it did not want to alienate its institutional customers. Salomon and Goldman had been the only leading Wall Street firms without such business/division. Donaldson, Lufkin & Jenrette, Shearson Lehman Hutton and Morgan Stanley had divisions with billions of dollars under management in mutual fund and pension fund accounts.

Mr. Cooperman, who has been with the firm for 22 years, will give up his position as head of equity research. The new business being formed as a division already invests $13 billion in money market funds for bank trust departments and bond accounts for institutional investors. Equity management will generate higher fees for Goldman than money market funds.

An announcement was made at that time "The 80-member division will be moved out of Goldman's headquarters in lower Manhattan to a separate location in the Wall Street area for ''legal and appearance purposes."''According to Cooperman said, that was done to signal that money management operation will not receive critical research information before the customers who pay high commissions for such services.

Mr. Cooperman was succeded by Michael Armellino, a partner in the research department as head of research department.

Robert Jones, a research analyst in the investment bank working on quantitative models, convinced Goldman client Bell Atlantic Corp. to let him manage $100 million in U.S. equities. Armed with the mandate, he persuaded Cooperman to bring him over to GSAM to launch a quantitative equities group in the asset management division.

Cooperman wanted to manage hedge funds, but Goldman's management committee turned him down. Senior partners did not approve the proposal. Cooperman quit Goldman in 1991 to set up his own hedge fund business, Omega Advisors.

In 1996, John McNulty, who had begun his Goldman career as an adviser in the private wealth management business, became a co-head of GSAM, along with David Ford, who had been appointed in 1994. McNulty led an aggressive expansion drive, and this time Goldman was more willing to consider hedge funds.

McNulty started selling Global Alpha, GSAM's first hedge fund, which was seeded with $10 million in capital from Goldman. The fund was designed and overseen by Clifford Asness, who holds a doctorate in finance from the University of Chicago and had been hired some years earlier.

McNulty acquired businesses for driving growth. In 1996 he purchased British pension fund manager CIN Management, which added $23 billion in assets, and Tampa, Florida­based growth equity manager Liberty Investment Management, which oversaw $6 billion in assets. The following year, he snapped up Princeton, New Jersey­based Commodities Corp., a managed-futures specialist that ran about $1.6 billion.

In January 1998, Asness left Goldman to set up his own firm, Greenwich, Connecticut­based AQR Capital Management. He took nine Goldman people with him, leaving only a handful of junior members and two senior members.

Robert Litterman, Goldman's head of risk management, was called in to head up a new group, quantitative resources, that included the team left behind by Asness. Within months, the two senior members, Carhart and Iwanowski were put in charge, and they quickly set about rebuilding the operation, hiring three senior staffers in their first year at the helm.

Goldman put its asset management and private wealth businesses under a new umbrella division, called investment management, shortly before the firm's 1999 initial public offering. McNulty became head of investment management and oversaw an expanded senior team. Philip Murphy, a former head of Goldman Sachs in Asia, returned to New York to head wealth management, and David Blood, a Goldman veteran, joined Ford as co-head of GSAM.

Doug Grip
President of Goldman Sachs Funds.

McNulty retired in 2001. He was succeeded by Philip Murphy and Peter Kraus, the former head of the financial institutions group.

Murphy retired in 2003. Schwartz was appointed as co-head of investment management by Goldman's then-CEO, Henry Paulson Jr., who became U.S. Treasury secretary, later. He and Kraus were given direct responsibility for GSAM.

In one of their first moves as co-heads, Schwartz and Kraus formalized GSAM's structure as a federation of distinct investment boutiques organized by asset class and subdivided by investing style, from funds of hedge funds and quantitative macro strategies to growth stocks and fixed income. Each of the boutiques(there are now 11) is charged with competing against the best firm in its respective area. GSAM's fixed-income business measures itself against bond houses BlackRock and Pacific Investment Management Co. rather than, say, Lehman and Morgan Stanley.

The GSAM boutiques have their own heads or co-heads and dedicated research teams. The heads report directly to Kraus and Schwartz and run their businesses independently.

The boutiques are encouraged to launch their own hedge fund strategies alongside long-only offerings. A case in point is the quantitative equities team. It has set up two hedge funds in the past four years, one investing in North American stocks and one that plays global equity markets. They plan to add another that invests in emerging markets.

GOLDMAN, SACHS & CO. analysts in a report on asset management business in 1995 predicted that within a few short years the money management business would be dominated by a few giant firms, alongside scores of specialist boutiques. The Goldman analysts declared that big fund managers would need at least $150 billion in assets to survive. At the time, just nine firms in the U.S. had that much. Goldman itself had only $46.3 billion in assets and was at 52nd-place slot in the 1995 Institutional Investor 300 ranking of the biggest money managers.

Goldman asset management division believe in their analysis and built their business to No. 14 by 2006 and at the end of February 2007 the asset under management were $719 billion. A cool $147 billion of those assets are in highly lucrative alternative investments. "We've got even more growth to come," asserts a confident Eric Schwartz, 44, who now runs the asset management business with Peter Kraus, 54.

The plans include, doubling in five years, the $102 billion they oversee in quantitatively managed equity portfolios, partly by selling new funds that invest in emerging markets and other new products, doubling the $213 billion they manage in fixed-income securities by aggressively targeting insurers and wealthy individuals seeking absolute-return and municipal bond strategies. They plan to keep pressing the accelerator in the hedge fund business by adding strategies and recruiting traders like the 18 credit specialists they hired in December from collapsed hedge fund Amaranth Advisors.

Goldman Sachs has appointed Edward Forst, its chief administrative officer, as co-head of its asset management division, one of the largest in the world with $800bn under management.

Mr Forst will share the role with Peter Kraus, who has been there for several years. He replaces Eric Schwartz, who left the firm this year to pursue other interests. Mr. Forst is based in London and he will still be there. Mr Forst, who joined Goldman in 1994, was co-head of operations, technology, finance and services for the past three years

Goldman appears to be committed to its asset management division, which has seen rapid growth, while Merrill sold its business to Black Rock and Citi sold its business to Legg Mason.

Raanan A. Agus, 39, head of equity proprietary trading desk at Goldman Sachs, where traders make bets on stocks with the bank’s own capital, moved to asset management division to start a hedgefund.

Mr. Agus will move part of his principal strategies team and this happended for the first time in Goldman Sachs. The group headed to Goldman Sachs Asset Management includes Mr. Agus, Kenneth Eberts, head of United States investments for principal strategies, half the United States team and the entire principal strategies team in Tokyo.

The fund, will be the bank’s first significant “long-short” fund, one which invests in stocks (“going long”) and hedges with bets that prices will fall (“going short”). Goldman already runs several hedge funds in its asset management division, including its flagship, the $10 billion Global Alpha fund.

Goldman has focused on building the hedge funds it runs in an effort to generate more fees and offer more variety to clients. Earlier this summer it raised $2.6 billion for its Liberty Harbor, a credit fund run by Greg Felton, who came from Amaranth Advisors. In all, Goldman runs about $40 billion in hedge fund assets, making it among the largest hedge fund complexes.


In the first quarter of 2008, the Goldman Sachs saw a 32% decline in investment banking revenue and a 46% percent drop in its trading and principal investments division. But itsasset management and securities services, provided a 28% increase in revenue. Also, Goldman Sachs increased its assets under management by $5 billion to $873 billion. The inflow of funds is more in money market assets.


No comments: