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A hi-tech hedge fund belonging to Goldman Sachs, the investment bank, was so badly hit by last week’s stock market turbulence that it lost over $1.5bn (£750m) of its value after its computer algorithms failed to deal with the unpredictable market changes.

A hi-tech hedge fund belonging to Goldman Sachs was so badly hit by last week’s stockmarket turbulence that it lost over $1.5bn (£750m) of its value after the computer algorithms it was using failed to deal with the unpredictable markets.

The investment bank’s Global Equity Opportunities (GEO) hedge fund is being bailed out with $2bn (£1bn) of Goldman’s own cash, and $1bn (£500m) from outside investors including CV Starr, Perry Capital and Eli Broad.

The GEO fund is driven by a quantitative strategy, which means it uses programs for entering trading orders, with the computer algorithm deciding on certain aspects of the order such as the timing, price, or even the final quantity of the order.

But the algorithms used by Goldman’s GEO fund failed to weather the heavy falls recorded in markets around the world.

Goldman’s chief financial officer, David Viniar, denied that the company was now saving the fund from collapse, saying: “This is not a rescue.”

The company also defended the existing business, though it admitted that difficult market conditions had “combined to challenge many of the trading algorithms used in quantitative strategies”.

Algorithmic trading of stocks has become widespread in recent years. Both the London and Swiss stock exchanges have recently improved their algorithmic trading capacity to handle this.