2 and 20? How about 22.7?

It might finally be dawning on the establishment financial world that hedge funds aren't all they're cracked up to be.  A couple of blowups at Bear Stearns can be blown off as anomalies.  Ditto for the deliciously-named Y2K and Jolly Roger funds* that halted redemptions this week.  But when Goldman Sachs's premier hedge fund falls 22.7% in a month, people might start taking notice.

Or not.  The Wall Street Journal felt this was worthy of only Page C2:

For years, Goldman Sachs Group Inc.'s flagship Global Alpha hedge fund could do no wrong. Over the past year, it has been able to do almost nothing right.

August was the worst month in the fund's 12-year history; it was down 22.7% last month alone, according to a recent letter to investors. So far this year through the end of August, it was down 33.4% due to bad bets on everything from the Australian dollar, the Norwegian stock market and Japanese government bonds. The letter gave no indication about how the fund was faring this month. Over the past 12 months, the fund has lost 37% of its value.

A 22.7% loss in August?  When the S&P, for all its ups and downs, eked out a gain of 1%?  What is Goldman's excuse?

The letter outlined a litany of bad bets and problems, some of which the fund managers blamed on the massive selling by other funds as credit suddenly dried up in early August and investors in some funds started asking for their money to be returned. That forced many funds to sell assets to raise money. Most of those problems started in the market for subprime mortgages and then spread.

Ah, the classic "It's not our fault" defense.  But if the guys who run these funds are supposed to be so brilliant, shouldn't they have seen this coming?

Maybe these hedge fund debacles will finally discredit the notion that mathematical genius alone holds the key to financial wizardry.  But then, one might have hoped the same thing when LTCM blew up in 1998.

*Perhaps the Jolly Roger funds should be renamed Sad Sack, just as Yosemite Sam rechristened his pirate ship.

The Daily Reckoning