Last week, Goldman Sachs (NYSE:GS) reported earnings that suggested the Wall Street bank has largely sidestepped the credit crisis that has badly burned its competitors. Robert Litterman, a managing director at Goldman Sachs Asset Management, revealed another good omen this week. Goldman's flagship quantitative hedge fund, Global Alpha, is up about 20% so far this year after two years of losses, including a horrific performance in 2007 during which the fund shed 40% of its value.

Getting past an annus horribilis
Despite this year's gains, the fund remains well below its "high-water mark," the prior peak value the fund needs to achieve before Goldman can begin earning its lucrative performance fees. In addition, thanks to investor redemptions and fund losses, the fund's assets under management have shrunk by more than three-fourths from their high, to less than $3 billion. Combine both these factors and it's clear that Global Alpha is far from being the fee-generating engine it once was.

This case shows the benefits to a hedge fund of being under the roof of a well-capitalized and diversified parent. Global Alpha's 2006-2007 performance might have been the death knell for many independent hedge funds, causing investors to pull their money and flattening a portfolio manager's incentive to dig himself out of the hole. When quantitative funds ran into trouble last summer, Goldman added capital to one of its funds.

Two roads to stability for hedge funds
Certainly, investment banks have shown their appetite to tie up with hedge funds. JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), and Lehman Brothers (NYSE:LEH) have all made acquisitions in this area. Will the trend accelerate? Acquiring such businesses is not without risk: Citigroup (NYSE:C) recently announced it is shuttering Old Lane Capital less than a year after it shelled out $800 million to buy it.

To achieve greater stability, hedge funds do have another option: an initial public offering. Fortress Investment Group (NYSE:FIG) was the first alternative manager to go public last year, followed by Blackstone (NYSE:BX) and two others. The credit crunch put a halt to similar listings (there are persistent rumors about Citadel Investment Group), but I expect this to be a temporary hiatus.

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