Last Updated: April 4, 2008: 10:19 AM EDT
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Goldman pulls plug on an AQR account

AQR Capital's account for Goldman Sachs' 401(k) investors performed poorly - and now it's shutting.

By Katie Benner, writer-reporter

NEW YORK (Fortune) -- After months of poor performance, Goldman Sachs has stopped offering an investment account that AQR Capital Management created for the bank's 401(k) lineup.

According to a letter written by Goldman Sachs, that fund "has already begun unwinding positions in order to ensure an orderly liquidation and close of the fund on April 30." People close to the matter say that the process has been completed.

While Goldman will no longer offer the AQR 401k product to employees, it still has more than $500 million in other accounts with AQR for its clients.

The 401(k) fund - Global Relative Value - was designed to be a relatively high volatility investment based on the strategies used by AQR Capital Management's Global Asset Allocation hedge fund. According to a Bloomberg report, Global Asset Allocation was down 16% in the first six weeks of this year.

The fund in the Goldman 401(k) has lost 21% of its value from the beginning of this year to the date of termination, down to $28 million from $36 million. (See correction at end of story.)

Although small when compared to AQR's total $8.6 billion hedge fund portfolio, Global Relative is among several AQR funds and accounts that have tanked since the credit crisis hit last summer. The firm's hedge fund assets under management have shrunk from about $11 billion at the beginning of 2007.

According to a Bloomberg report, the Greenwich, Connecticut firm's flagship $2.9 billion Absolute Return Fund was down almost 15% through Feb. 15.

While many smaller funds are expected to close amid the current financial turmoil, it is notable that a sterling name like AQR would run into these problems.

The firm was founded by Goldman Sachs Asset Management alum Cliff Asness, the University of Chicago-educated math whiz that ran some of the last decade's most successful hedge funds.

AQR was among the first firms to create quantitative hedge funds - funds that use mathematical models to find and profit from small mispricings in the stock market. This strategy is also referred to as "black box trading."

Performance bleed

Global Relative is not the only example of a hedge fund's woes impacting investors beyond that hedge fund's small universe of wealthy investors. Not only did AQR run some very successful hedge funds for its clients, the firm was a darling among large asset managers, who hired AQR to manage money for their clients. In these arrangements, which are very common, the woes of one firm will bleed into another. (See correction at end of story.)

For example, Russell Investments, which has $200 billion in assets under management, used four money managers for its long-only Non-US Fund: Altrinsic Global Advisors, AQR Capital Management, MFS Institutional Advisors, and Wellington Management Company.

"Only one of the four managers in the Fund [Wellington] outperformed for the period [2007]," Russell wrote in its SEC filing.

MFS and Altrinsic emphasized growth-at-a-reasonable-price, a strategy that was a loser last year when the market favored stocks with high growth rates, good price momentum, and high valuations.

As for AQR, Russell writes that it was "negatively impacted by a steep sell-off affecting quantitative managers in the second half of the year. Its emphasis on stocks with both attractive valuations and momentum was out-of-favor particularly in the latter half of the year."

Russell did not return a call for comment.

AQR and Goldman declined to comment.

CORRECTION: The fund in the Goldman 401(k), Global Relative Value, has lost 21% of its value from the beginning of this year to the date of termination, not last year as initially reported.

An earlier version of the story said that Russell had put fund of fund clients into AQR hedge funds. That is incorrect. AQR managed money for Russell's long only Non-U.S. Fund.

A headline on the CNNMoney home page, 'Another hedge fund bites the dust,' mischaracterized this story - it was a Goldman 401(k) account based on an AQR hedge fund that was shutting, not an AQR hedge fund.  To top of page

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