The Goldman Sachs 401(k)
A Hedge Fund for the Average Investor?
What’s in a name? Everything. And that is more of a curse than a blessing.
People are easily swayed by brand names and company images: eye-catching logo designs, creative slogans, famous spokespeople, even adorable mascots. A lot of careful planning goes into building a brand and image because once a company gets its name into consumers’ heads and hearts, it will have them eating out of its palm without much more effort than simply displaying its readily-recognizable company name.
The problem with this is that company can then easily package together a load of garbage and still manage to sell it at a premium just on the clout of its name. And this may well be the case with Goldman Sachs’ (NYSE: GS) new investment fund – “The Goldman Sachs Multi-Manager Alternatives Fund”.
The Fund’s Intention
Goldman Sachs announced last week that it wants to offer the ordinary, unsophisticated investor the opportunity to invest like the top 1% does. Thank you, Goldman Sachs, now even the little guy can invest like the banks and big shots do.
What is more, with this new GS Multi-Manager Alternatives Fund, even the little guy can be cleaned-out like the banks and big shots were 5 years ago. For this fund is packaging together all those high-risk, difficult to understand, and difficult to scrutinize investments that created the credit crisis that nearly bankrupted them and the nation. And they have packaged it up for little ole’ us.
The fund is comprised of multiple funds – a portfolio of funds, if you will. But these aren’t just any investment funds; these are hedge funds, considered the riskiest and least regulated of all.
The fund will invest in all your favorite credit crisis sludge, including “convertible bonds, junk bonds, bank loans, mortgage backed securities, credit default swaps, structured products, swaptions [swap options], total return swaps, swaps on futures, variance swaps and contracts for difference, among other arcane financial instruments” lists The Street.
Ew. That is some pretty slimy stuff to be peddling onto the unsophisticated “just-trying-to-put-our-kids-through-school” and “save-for-our-retirement” average investors. But hey, there’s a really sparkling and well-known bank name in the title. Maybe its perfumed scent will mask the stench.
Goldman says it is just trying to provide the other 99% of investors with more investment opportunities and options to choose from, since the average investor often lacks access to these hedged products and strategies.
“Achieving this exposure has traditionally been difficult,” Goldman Sachs explains in its recent press release. “We believe this has left many individual investors’ portfolios and retirement accounts underweight alternatives, relative to their institutional counterparts.”
Well, GS, perhaps there’s a reason why the average investor has not had access to these types of investments… because they are too darned risky! These are intended for “accredited,” “high-net worth” investors who wouldn’t be sent to the poorhouse should the investments fail – which these types often do.
Identify What Smells
Have you seen that commercial where they put blindfolded people in a room full of garbage and ask them to identify the smells? Well, let’s play that game now with Goldman Sachs' own description of its “Multi-Manager Alternatives Fund”, with passages taken from the company's press release.
- “The Goldman Sachs Multi-Manager Alternatives Fund allocates its assets among multiple investment managers (“Underlying Managers”) who are unaffiliated with the Investment Adviser…”
This is kind of like that donut shop inside of your local book store; just another party snuggling under the umbrella of a well-known name brand. Or worse still, it’s kind of like outsourcing. I can just imagine the web of phone calls and emails you have to go through to fix any problems.
- “…who employ one or more non-traditional and alternative investment strategies.”
They don’t seem too worried about stressing the “non-traditional” aspect of it. It sounds like one of those “buyer-beware” and “no returns” disclaimers. Can you give us a better description of these non-traditional and alternative strategies?
- “A strategy implemented by an Underlying Manager and/or the use of quantitative models to implement that strategy may fail to produce the intended results.”
Oh, well, there’s a description of sorts, I guess. It may not do what you expected it to.
- “At times, the Fund may be unable to sell certain of its illiquid investments without a substantial drop in price…”
With so many viable investment options out there that are in constant demand and can be exited easily without a “substantial drop in price”, do you have to pick the hardest ones to unwind?
- “Derivative instruments may involve a high degree of financial risk, including the risk that a small movement in the price of the underlying security or benchmark may result in a disproportionately large movement, unfavorable or favorable, in the price of the derivative instrument; the risk of default by a counterparty; and liquidity risk.”
Ah, yes, leverage. They are talking about leverage there. Seems like the banks have been talking about leverage for quite some time now – namely their need to get rid of it because being over-leveraged was one of the causes that lead to the financial crisis a few years back. And this is how they plan on getting rid of leverage, by dumping it into the portfolios of average unaccredited investors? Oh, I see. Too much leverage was bad for you, but it’s ok for us. If it’s too rotten for you to eat, don’t feed it to the rest of us.
- “Over-the-counter transactions are subject to less government regulation and supervision.”
Oh, so that’s how they can do that. No one is watching them dispense this stuff.
- “The Fund may have a high rate of portfolio turnover, which involves correspondingly greater expenses which must be borne by the Fund, and is also likely to result in short-term capital gains taxable to shareholders.”
Now there is a dream job if I ever saw one. They can generate greater fees for themselves simply by trading more often, and they tell us from the beginning that they will. Kind of like a mechanic having free reign over your car’s maintenance.
- “The Fund’s investments in other pooled investment vehicles subject it to additional expenses.”
Of course. While you’re at it, bill me for your friends’ lunches too.
- “The Fund is ‘non-diversified’ and may invest more of its assets in fewer issuers than ‘diversified’ funds. Accordingly, the Fund may be more susceptible to adverse developments affecting any single issuer held in its portfolio and to greater losses.”
OK. Now on this point, I must put all joking aside. What they are saying is this: here we have a fund made up of multiple funds, and yet the fund may not be diversified. Isn’t that like inviting the public to come to your showroom full of a wide selection of black cars?
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Just how are they selecting this inventory of funds they are pooling together? If they know from the start that the fund is subject to greater risk because it is under-diversified, you would think they would compile a better selection of funds.
All other risks I can understand, since they are exposed to outside factors not under management’s control. But the selection of funds to include within the main fund is completely within management’s control, and yet they choose to release it to the public half-baked.
To Each Their Own
It is not my place at all to limit the choices available to investors. This is the Internet age, where financial and investment information is readily available to anyone who searches for it. You are capable of making your own informed decision to invest in whatever you wish. And who knows, the Goldman Sachs Multi-Manager Alternatives Fund may actually turn out to outperform even Warren Buffet’s portfolio.
It all hinges on risk. Rewards can be found anywhere and everywhere. You can even dig it out of the ground yourself. Or you can trust a professional to manage your investments for you.
But what is the cost to you? High transaction fees that might be saved if you went with a no-load mutual fund? High management expenses that might be saved if you went with a passive index-tracking ETF?
And what are the risks to you? Would a dividend mutual fund paying 6% per year with little volatility be easier for you to stomach? Or if you do have room in your risk profile to tolerate some loss, might that room for extra risk be better filled by a fund that stands a better chance of success?
Perhaps the most important question an investor needs to ask him/herself is: Do I understand this investment? Only if you understand it well can you better gauge the actual risks and likely rewards. Only if you understand it well can you better fit the investment into your portfolio in proper measure and proper weight.
Everything else is just salesmanship. If even the most famous person in the world tries to sell you something, take a good look inside the box and not just at the person's elegant signature of endorsement.
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