Could a Few Hedge Funds Spoil the Party?
07-03-2005, 10:41 AM
#1
I feel the need...
Thread Starter
Could a Few Hedge Funds Spoil the Party?
Could a Few Hedge Funds Spoil the Party?
By ANNA BERNASEK
WHEN the Long Term Capital Management hedge fund was sinking in 1998, leaders of the Federal Reserve were worried. They feared that if the fund failed, a major disruption could be set off in financial markets, with dire consequences for the global economy. Indeed, that worry was the impetus for the hastily arranged bailout of the fund. Since then, the financial system hasn't faced a similar test. At least not so far.
Lately, though, there have been signs that hedge funds are again taking on big risks. That's not to suggest that a crisis is imminent, but the situation does raise important questions: While the rewards of hedge fund investing are well known, what about the downside? Could the actions of hedge funds again threaten the economy?
The numbers involved are enormous. At its near-collapse in 1998, Long Term Capital Management held $5 billion of its investors' money. In the seven years since then, the hedge fund industry as a whole has nearly tripled in size, now wielding more than $1 trillion in invested funds. With so many more funds and so much more money, it is becoming a lot harder to be confident that the industry is being responsible.
And the incentive to take risks with all that money is huge. A typical fee structure, called "2 and 20," gives managers 2 percent of the assets under management and 20 percent of gains realized by the fund. At large funds, this means that a single year's winnings can set up the managers for life. But as more funds pile into the winning strategies of the past, competition inevitably shrinks profit margins. And that has tempted managers to find new, sometimes riskier ways to maintain their spectacular returns.
The crowding effect is visible in some markets, particularly fixed income and convertible arbitrage, which hedge funds have come to dominate. In May, in its latest report on global financial security, the International Monetary Fund found that hedge funds might account for 80 to 90 percent of all participants in those markets. Because of that high concentration of hedge funds, the I.M.F. warns of trouble. It found that those funds, if stressed, might find themselves all selling at once, putting a strain on the entire financial system.
How can outsiders judge the risks of hedge funds? Ever since the Long Term Capital bailout, hedge fund leverage has been a concern for regulators and parties dealing with the funds. Leverage is attractive to hedge funds because it lets them make much bigger bets than they could otherwise. By taking large leveraged positions, hedge funds benefit handsomely when things go right. But when things go wrong, losses are similarly multiplied.
Return to Long Term Capital for a moment. Starting with just $5 billion in capital, the fund was able to get $125 billion in additional funds. Using that leverage, it took on trading positions with an estimated potential value of $1.25 trillion. Despite the fund's seemingly brilliant strategy, the high leverage meant that it didn't take much of a setback to wipe out the fund's underlying capital. And the potential freezing of $1 trillion worth of positions, even temporarily, was seen as a major risk to the system.
What is happening to leverage today? Timothy F. Geithner, president of the Federal Reserve Bank of New York, discussed the issue in a recent speech. In his view, leverage in the industry has decreased, on average, since the 1998 bailout. Over the last year, though, the Federal Reserve and the I.M.F. have noticed that leverage is creeping back in some areas, probably because of heightened competitive pressure.
The trouble is that average leverage isn't really a good indication of the risks involved. Even if the industry is generally healthy, a couple of very bad apples could spoil everything. After all, the Long Term Capital Management crisis started with just one fund, not the whole industry.
On that score, there has been talk on Wall Street about risky hedge funds. In particular, some traders who deal with hedge funds suspect that leverage in some cases today exceeds that of Long Term Capital Management. And borrowed money isn't the only reason. Traders concern themselves with a broader measure called economic leverage, which takes borrowing into account but also includes risks like those arising from derivatives and other complex financial arrangements. Economic leverage can be high even when borrowing, or balance-sheet leverage, is moderate.
Another concern involves hedge funds that invest not in the markets, but in other hedge funds. These "funds of funds" sometimes employ leverage as well, creating a layering effect. The financial partners who lend to or trade with funds of funds take on some of the extra risk, increasing overall risk to the financial system. Similarly, leverage is created by offering specially constructed products to hedge fund investors.
FOR regulators and the public, the available information on leverage is not terribly comforting. Hedge fund research groups rely on voluntary reporting from the funds. This means that the data they collect reflects only a self-selected slice of the industry putting its best foot forward. A 2003 study by the Center for International Securities and Derivatives Markets found balance-sheet leverage at hedge funds ranging from less than one times capital to 25 times capital. But because hedge funds can shift positions or increase leverage almost instantly, it's not clear that a static snapshot conveys the information needed.
True economic leverage is nearly impossible to understand without full disclosure of all of a hedge fund's commitments. This means that many decision makers - at banks, in government and on Wall Street - are merely guessing at the risk components they can't see. Individual funds have all the relevant facts pertaining to themselves, but nobody has the complete picture. And that may be the biggest risk of all.
http://www.nytimes.com/2005/07/03/bu...gewanted=print
By ANNA BERNASEK
WHEN the Long Term Capital Management hedge fund was sinking in 1998, leaders of the Federal Reserve were worried. They feared that if the fund failed, a major disruption could be set off in financial markets, with dire consequences for the global economy. Indeed, that worry was the impetus for the hastily arranged bailout of the fund. Since then, the financial system hasn't faced a similar test. At least not so far.
Lately, though, there have been signs that hedge funds are again taking on big risks. That's not to suggest that a crisis is imminent, but the situation does raise important questions: While the rewards of hedge fund investing are well known, what about the downside? Could the actions of hedge funds again threaten the economy?
The numbers involved are enormous. At its near-collapse in 1998, Long Term Capital Management held $5 billion of its investors' money. In the seven years since then, the hedge fund industry as a whole has nearly tripled in size, now wielding more than $1 trillion in invested funds. With so many more funds and so much more money, it is becoming a lot harder to be confident that the industry is being responsible.
And the incentive to take risks with all that money is huge. A typical fee structure, called "2 and 20," gives managers 2 percent of the assets under management and 20 percent of gains realized by the fund. At large funds, this means that a single year's winnings can set up the managers for life. But as more funds pile into the winning strategies of the past, competition inevitably shrinks profit margins. And that has tempted managers to find new, sometimes riskier ways to maintain their spectacular returns.
The crowding effect is visible in some markets, particularly fixed income and convertible arbitrage, which hedge funds have come to dominate. In May, in its latest report on global financial security, the International Monetary Fund found that hedge funds might account for 80 to 90 percent of all participants in those markets. Because of that high concentration of hedge funds, the I.M.F. warns of trouble. It found that those funds, if stressed, might find themselves all selling at once, putting a strain on the entire financial system.
How can outsiders judge the risks of hedge funds? Ever since the Long Term Capital bailout, hedge fund leverage has been a concern for regulators and parties dealing with the funds. Leverage is attractive to hedge funds because it lets them make much bigger bets than they could otherwise. By taking large leveraged positions, hedge funds benefit handsomely when things go right. But when things go wrong, losses are similarly multiplied.
Return to Long Term Capital for a moment. Starting with just $5 billion in capital, the fund was able to get $125 billion in additional funds. Using that leverage, it took on trading positions with an estimated potential value of $1.25 trillion. Despite the fund's seemingly brilliant strategy, the high leverage meant that it didn't take much of a setback to wipe out the fund's underlying capital. And the potential freezing of $1 trillion worth of positions, even temporarily, was seen as a major risk to the system.
What is happening to leverage today? Timothy F. Geithner, president of the Federal Reserve Bank of New York, discussed the issue in a recent speech. In his view, leverage in the industry has decreased, on average, since the 1998 bailout. Over the last year, though, the Federal Reserve and the I.M.F. have noticed that leverage is creeping back in some areas, probably because of heightened competitive pressure.
The trouble is that average leverage isn't really a good indication of the risks involved. Even if the industry is generally healthy, a couple of very bad apples could spoil everything. After all, the Long Term Capital Management crisis started with just one fund, not the whole industry.
On that score, there has been talk on Wall Street about risky hedge funds. In particular, some traders who deal with hedge funds suspect that leverage in some cases today exceeds that of Long Term Capital Management. And borrowed money isn't the only reason. Traders concern themselves with a broader measure called economic leverage, which takes borrowing into account but also includes risks like those arising from derivatives and other complex financial arrangements. Economic leverage can be high even when borrowing, or balance-sheet leverage, is moderate.
Another concern involves hedge funds that invest not in the markets, but in other hedge funds. These "funds of funds" sometimes employ leverage as well, creating a layering effect. The financial partners who lend to or trade with funds of funds take on some of the extra risk, increasing overall risk to the financial system. Similarly, leverage is created by offering specially constructed products to hedge fund investors.
FOR regulators and the public, the available information on leverage is not terribly comforting. Hedge fund research groups rely on voluntary reporting from the funds. This means that the data they collect reflects only a self-selected slice of the industry putting its best foot forward. A 2003 study by the Center for International Securities and Derivatives Markets found balance-sheet leverage at hedge funds ranging from less than one times capital to 25 times capital. But because hedge funds can shift positions or increase leverage almost instantly, it's not clear that a static snapshot conveys the information needed.
True economic leverage is nearly impossible to understand without full disclosure of all of a hedge fund's commitments. This means that many decision makers - at banks, in government and on Wall Street - are merely guessing at the risk components they can't see. Individual funds have all the relevant facts pertaining to themselves, but nobody has the complete picture. And that may be the biggest risk of all.
http://www.nytimes.com/2005/07/03/bu...gewanted=print
07-04-2005, 08:45 AM
#2
Senior Moderator
I'm too scared to put $$$ into hedge funds. Just when Kerkorian decided to invest in GM ... a bunch of hedge funds went down the tubes in market cap, which in turned caused the NYSE to go down a bunch of points. Forget that!
07-26-2005, 05:24 PM
#3
I feel the need...
Thread Starter
A New Get-What-You-Pay-For View of Money Managers: Chet Currier
2005-07-26 00:17 (New York)
(Commentary. Chet Currier is a Bloomberg News columnist. His
opinions are his own.)
By Chet Currier
July 26 (Bloomberg) -- Ross Miller is out to change
investors' ideas of what's a bargain and what isn't in money
management.
When you consider carefully what you are paying for, he says,
hedge funds may not look as costly as they are often portrayed --
and mutual funds may be ``more expensive than commonly believed.''
New research by Miller, a professor of finance at the State
University of New York at Albany, may find its main audience among
professionals. But its way of looking at fund costs can serve as
an eye-opener for individual shareowners too.
The standard image of hedge funds, or private partnerships
designed for the wealthiest investors, casts them as high-cost
propositions, with the typical manager charging 1 percent to 2
percent of assets per year plus a 20 percent slice of the profits.
That stacks up unfavorably against fees of 1 percent or less at
some popular mutual funds. Miller says this comparison is flawed.
``Mutual funds appear to provide investment services for
relatively low fees because they bundle passive and active funds
management together in a way that understates the true cost of
active management,'' he writes in a working paper. To get a more
accurate picture, he said on the telephone, ``you cut the stuff in
parts and reallocate the dollars.''
Alpha and Beta
Much of the payoff produced by an all-stocks-all-the-time
mutual fund may be seen as coming from market return, known in the
business as ``beta.''
If a broadly diversified large-stock fund is up 15 percent in
a year when the Standard & Poor's Index rises 12 percent, an
observer can conclude that all of the fund's gain wasn't achieved
via pure stock-picking skill. Maybe only the top 3 percentage
points represented the result of skill, or ``alpha.''
As Paul McCulley, managing director and fund manager at
Pacific Investment Management Co., put it recently in a different
context, ``Remember, benchmark performance -- beta -- can be had
for virtually free; alpha is what active managers are paid to
generate.''
Suppose in our example that the first 12 percentage points
are deemed an index return, worth no more than an index fund
manager's fee of, say, one- to two-tenths of a percentage point of
assets per year.
Seen in this light, the portion of the fund's fee that is
higher all goes to pay for the last 3 percentage points of gain.
Call that the ``active expense ratio.''
Misgivings
``At the end of 2004, the mean active expense ratio for the
large-cap equity mutual funds tracked by Morningstar was 7
percent, over six times their published expense ratio of 1.15
percent,'' Miller writes.
Now, the case can be argued that returns don't lend
themselves to being so cavalierly split this way. How can you do
that with some tried-and-true active manager who doesn't manage
against any market index, but picks stocks one by one on their
fundamental merits?
Like it or not, however, the active manager is open to
competition from believers in the idea of separate pieces. A big
client can say to the manager, ``Instead of buying your fund, I'm
going to put 80 percent of my money in a low-cost index fund and
the other 20 in a hedge fund. I'll buy my alpha from the hedge
fund and my beta from the index fund, at a net cost that's quite
reasonable compared with your fee.''
Package Deal
The day may be a long time off when rank-and-file mutual fund
investors get so fancy in their shopping for money-management
services. As long as they can get a decent return on their money,
fees have tended to rank pretty low on their list of priorities.
Even so, the increasing role of intermediaries such as
investment planners has helped make costs a more prominent issue.
Who's to say enterprising fund managers won't come along sometime
soon with packages, aimed straight at small investors, put
together using alpha and beta from separate sources?
As thinking like Miller's gets around, it promises to
intensify a big challenge that already looms for fund managers as
the 21st century unfolds. That will be to convince increasingly
sophisticated investors, and keep them convinced, that active
money management is worth its extra costs.
2005-07-26 00:17 (New York)
(Commentary. Chet Currier is a Bloomberg News columnist. His
opinions are his own.)
By Chet Currier
July 26 (Bloomberg) -- Ross Miller is out to change
investors' ideas of what's a bargain and what isn't in money
management.
When you consider carefully what you are paying for, he says,
hedge funds may not look as costly as they are often portrayed --
and mutual funds may be ``more expensive than commonly believed.''
New research by Miller, a professor of finance at the State
University of New York at Albany, may find its main audience among
professionals. But its way of looking at fund costs can serve as
an eye-opener for individual shareowners too.
The standard image of hedge funds, or private partnerships
designed for the wealthiest investors, casts them as high-cost
propositions, with the typical manager charging 1 percent to 2
percent of assets per year plus a 20 percent slice of the profits.
That stacks up unfavorably against fees of 1 percent or less at
some popular mutual funds. Miller says this comparison is flawed.
``Mutual funds appear to provide investment services for
relatively low fees because they bundle passive and active funds
management together in a way that understates the true cost of
active management,'' he writes in a working paper. To get a more
accurate picture, he said on the telephone, ``you cut the stuff in
parts and reallocate the dollars.''
Alpha and Beta
Much of the payoff produced by an all-stocks-all-the-time
mutual fund may be seen as coming from market return, known in the
business as ``beta.''
If a broadly diversified large-stock fund is up 15 percent in
a year when the Standard & Poor's Index rises 12 percent, an
observer can conclude that all of the fund's gain wasn't achieved
via pure stock-picking skill. Maybe only the top 3 percentage
points represented the result of skill, or ``alpha.''
As Paul McCulley, managing director and fund manager at
Pacific Investment Management Co., put it recently in a different
context, ``Remember, benchmark performance -- beta -- can be had
for virtually free; alpha is what active managers are paid to
generate.''
Suppose in our example that the first 12 percentage points
are deemed an index return, worth no more than an index fund
manager's fee of, say, one- to two-tenths of a percentage point of
assets per year.
Seen in this light, the portion of the fund's fee that is
higher all goes to pay for the last 3 percentage points of gain.
Call that the ``active expense ratio.''
Misgivings
``At the end of 2004, the mean active expense ratio for the
large-cap equity mutual funds tracked by Morningstar was 7
percent, over six times their published expense ratio of 1.15
percent,'' Miller writes.
Now, the case can be argued that returns don't lend
themselves to being so cavalierly split this way. How can you do
that with some tried-and-true active manager who doesn't manage
against any market index, but picks stocks one by one on their
fundamental merits?
Like it or not, however, the active manager is open to
competition from believers in the idea of separate pieces. A big
client can say to the manager, ``Instead of buying your fund, I'm
going to put 80 percent of my money in a low-cost index fund and
the other 20 in a hedge fund. I'll buy my alpha from the hedge
fund and my beta from the index fund, at a net cost that's quite
reasonable compared with your fee.''
Package Deal
The day may be a long time off when rank-and-file mutual fund
investors get so fancy in their shopping for money-management
services. As long as they can get a decent return on their money,
fees have tended to rank pretty low on their list of priorities.
Even so, the increasing role of intermediaries such as
investment planners has helped make costs a more prominent issue.
Who's to say enterprising fund managers won't come along sometime
soon with packages, aimed straight at small investors, put
together using alpha and beta from separate sources?
As thinking like Miller's gets around, it promises to
intensify a big challenge that already looms for fund managers as
the 21st century unfolds. That will be to convince increasingly
sophisticated investors, and keep them convinced, that active
money management is worth its extra costs.
08-15-2005, 06:26 PM
#4
I feel the need...
Thread Starter
Get Hedge Fund Benefits Without Investing in Them: John Wasik
2005-08-15 00:03 (New York)
(Commentary. John F. Wasik, author of ``The Bear-Proof
Investor,'' is a columnist for Bloomberg News. The opinions
expressed are his own.)
By John F. Wasik
Aug. 15 (Bloomberg) -- Hedge funds are like promising new
drugs. They tend to be expensive and you don't know quite what
they're going to do.
While hedge funds can freely experiment with trading
strategies, for most individual investors, predictable returns and
lower risk and expenses are more worthy goals.
Tom Muldowney, managing director of Savant Capital Management
in Rockford, Illinois, says you can avoid the high costs of hedge
fund investing and lower your portfolio risk by holding no-frills
index funds.
``You have to be able to lose it all in a hedge fund,''
Muldowney says. ``For most people, this is unacceptable. If you
want to truly lower risk, you can use index (mutual or exchange
traded) funds that employ much lower than average risk with modest
expenses.''
To understand why hedge funds -- largely unregulated
investment pools for investors with more than $1 million in net
worth -- are desirable for enhancing returns and lowering risk,
you have to understand how hedge funds operate. The funds are
allowed to make any number of bets on the market using borrowed
money and derivatives, contracts whose value is tied to the value
of another asset or an index.
Because hedge fund managers aren't locked into a fixed
investment objective, they can trade in the opposite direction of
the market. While this can lower market risk, it often raises the
probability that managers will make bad guesses.
Costs of Funds
While such freedom in managing money has its advantages, it
also comes with a price. Hedge funds typically charge 1 percent to
2 percent in annual management fees and 20 percent of profits,
versus an average 1.5 percent fee for conventional stock mutual
funds.
A fund of funds, which owns several hedge funds, is among the
costliest vehicles to own. In addition to the underlying fund
expenses, these funds add another layer of charges.
You start out in a hole when investing in a hedge fund since
managers charge their fees even if they fail to beat market
benchmarks or lose money.
``If it (the manager's strategy) works, he gets a
compensation windfall,'' Muldowney says. ``If it fails, only the
investor loses. This compensation model creates an incentive for
the hedge fund manager to take additional risks.''
Fund Opacity
Regulation of hedge funds pales in comparison to that of
mutual funds and banks.
Hedge funds with more than $25 million in assets and more
than 15 clients must register as investment advisers with the U.S.
Securities and Exchange Commission by February 2006. At present,
hedge funds in the $1 trillion industry currently don't have to
report much information to investors.
``Even a moderately sophisticated investor wouldn't have the
tools to evaluate most hedge funds,'' says Marshall Blume, a
professor of finance at the Wharton School at the University of
Pennsylvania in Philadelphia.
Having studied how hedge funds operate, Blume said he is
troubled by the dearth of information provided on how funds price
their assets, disclose risks, and use derivatives and leverage.
``Many hedge funds play with complex custom-designed
derivatives, which are not traded often and not listed on the
exchanges,'' he said. ``Not only are outsiders in the dark about
these matters, but even the hedge funds may be unsure what these
instruments are worth.''
Alternatives
Want less volatility than a hedge fund? Muldowney says you
can achieve a return of about 7.8 percent -- after expenses -- by
holding a low-cost mix of index funds. Here's what he suggests:
-- 50 percent in bonds, inflation-protected securities and
international bonds.
-- 21 percent in U.S. large-company growth and value stocks.
-- 12 percent in U.S. small-company value stocks.
-- 11 percent in international large- and small-company
stocks.
-- 3 percent in emerging market stocks.
-- 3 percent in real estate investment trusts (commercial
property).
Muldowney, who has an eye on predictable returns, says
``since you control the allocation, you control the target rate of
return.''
Eye on Risk
One of the prime selling points of hedge funds is that they
may reduce market risk because managers can easily move in and out
of the stock market or bet against it. That is, they can be long,
short or neutral on market direction.
Yet because of poor disclosure, the risks are largely
unknown.
In contrast, Muldowney's allocation allows you to monitor and
control risk and target returns. The portfolio above, for example,
has a standard deviation (a common risk measure) of 9 percent.
That compares with a 20 percent standard deviation for large-
company stocks (from 1926 to 2004) and 33 percent for small-
company issues, according to Ibbotson Associates, a Chicago-based
research firm.
It's only natural for investors to want to exploit every
opportunity, especially when it involves a real or imagined market-
beating strategy.
Yet more money chasing fewer investment opportunities tends
to damp returns across the board. Managers also regress to the
mean -- in other words, one-time stars eventually become average
or below-average performers, particularly after their heavy
expense load is deducted.
One final bit of wisdom on hedge funds: ``Some (perhaps many)
hedge fund managers are likely to prove incapable of delivering
the returns that investors apparently expect.'' This observation
is not from a financial planner, academic or investor advocate.
You can thank Federal Reserve Chairman Alan Greenspan for this
pearl.
2005-08-15 00:03 (New York)
(Commentary. John F. Wasik, author of ``The Bear-Proof
Investor,'' is a columnist for Bloomberg News. The opinions
expressed are his own.)
By John F. Wasik
Aug. 15 (Bloomberg) -- Hedge funds are like promising new
drugs. They tend to be expensive and you don't know quite what
they're going to do.
While hedge funds can freely experiment with trading
strategies, for most individual investors, predictable returns and
lower risk and expenses are more worthy goals.
Tom Muldowney, managing director of Savant Capital Management
in Rockford, Illinois, says you can avoid the high costs of hedge
fund investing and lower your portfolio risk by holding no-frills
index funds.
``You have to be able to lose it all in a hedge fund,''
Muldowney says. ``For most people, this is unacceptable. If you
want to truly lower risk, you can use index (mutual or exchange
traded) funds that employ much lower than average risk with modest
expenses.''
To understand why hedge funds -- largely unregulated
investment pools for investors with more than $1 million in net
worth -- are desirable for enhancing returns and lowering risk,
you have to understand how hedge funds operate. The funds are
allowed to make any number of bets on the market using borrowed
money and derivatives, contracts whose value is tied to the value
of another asset or an index.
Because hedge fund managers aren't locked into a fixed
investment objective, they can trade in the opposite direction of
the market. While this can lower market risk, it often raises the
probability that managers will make bad guesses.
Costs of Funds
While such freedom in managing money has its advantages, it
also comes with a price. Hedge funds typically charge 1 percent to
2 percent in annual management fees and 20 percent of profits,
versus an average 1.5 percent fee for conventional stock mutual
funds.
A fund of funds, which owns several hedge funds, is among the
costliest vehicles to own. In addition to the underlying fund
expenses, these funds add another layer of charges.
You start out in a hole when investing in a hedge fund since
managers charge their fees even if they fail to beat market
benchmarks or lose money.
``If it (the manager's strategy) works, he gets a
compensation windfall,'' Muldowney says. ``If it fails, only the
investor loses. This compensation model creates an incentive for
the hedge fund manager to take additional risks.''
Fund Opacity
Regulation of hedge funds pales in comparison to that of
mutual funds and banks.
Hedge funds with more than $25 million in assets and more
than 15 clients must register as investment advisers with the U.S.
Securities and Exchange Commission by February 2006. At present,
hedge funds in the $1 trillion industry currently don't have to
report much information to investors.
``Even a moderately sophisticated investor wouldn't have the
tools to evaluate most hedge funds,'' says Marshall Blume, a
professor of finance at the Wharton School at the University of
Pennsylvania in Philadelphia.
Having studied how hedge funds operate, Blume said he is
troubled by the dearth of information provided on how funds price
their assets, disclose risks, and use derivatives and leverage.
``Many hedge funds play with complex custom-designed
derivatives, which are not traded often and not listed on the
exchanges,'' he said. ``Not only are outsiders in the dark about
these matters, but even the hedge funds may be unsure what these
instruments are worth.''
Alternatives
Want less volatility than a hedge fund? Muldowney says you
can achieve a return of about 7.8 percent -- after expenses -- by
holding a low-cost mix of index funds. Here's what he suggests:
-- 50 percent in bonds, inflation-protected securities and
international bonds.
-- 21 percent in U.S. large-company growth and value stocks.
-- 12 percent in U.S. small-company value stocks.
-- 11 percent in international large- and small-company
stocks.
-- 3 percent in emerging market stocks.
-- 3 percent in real estate investment trusts (commercial
property).
Muldowney, who has an eye on predictable returns, says
``since you control the allocation, you control the target rate of
return.''
Eye on Risk
One of the prime selling points of hedge funds is that they
may reduce market risk because managers can easily move in and out
of the stock market or bet against it. That is, they can be long,
short or neutral on market direction.
Yet because of poor disclosure, the risks are largely
unknown.
In contrast, Muldowney's allocation allows you to monitor and
control risk and target returns. The portfolio above, for example,
has a standard deviation (a common risk measure) of 9 percent.
That compares with a 20 percent standard deviation for large-
company stocks (from 1926 to 2004) and 33 percent for small-
company issues, according to Ibbotson Associates, a Chicago-based
research firm.
It's only natural for investors to want to exploit every
opportunity, especially when it involves a real or imagined market-
beating strategy.
Yet more money chasing fewer investment opportunities tends
to damp returns across the board. Managers also regress to the
mean -- in other words, one-time stars eventually become average
or below-average performers, particularly after their heavy
expense load is deducted.
One final bit of wisdom on hedge funds: ``Some (perhaps many)
hedge fund managers are likely to prove incapable of delivering
the returns that investors apparently expect.'' This observation
is not from a financial planner, academic or investor advocate.
You can thank Federal Reserve Chairman Alan Greenspan for this
pearl.
09-21-2006, 07:43 PM
#5
I feel the need...
Thread Starter
Amaranth Arouses Fear and Schadenfreude
How to lose a quick five billion. 
Mark Gilbert
Sept. 21 (Bloomberg) -- The game of ``fantasy headlines'' is
a popular journalistic pastime; which combination of nouns, names
and verbs would garner the most readers? It seems ``Hedge Fund
Collapses'' is the runaway winner, beating efforts that meld Sex,
Golf and Warren Buffett in barely credible assemblages.
The downfall of Amaranth Advisors LLC, which made a bad bet
on natural-gas prices that cost it about $4.6 billion this month,
is attracting enormous attention. The story was the most-read
article ever on Bloomberg News, beating the previous terrorism-
inspired record set in November 2001 by the crash of Flight 587
in New York.
Fear and schadenfreude are behind the curiosity in the
demise of a company most people had never heard of until this
month, and which even at its peak had only $9.2 billion under
management. The prurient interest in Amaranth, a second-tier
player in a $1.2 trillion industry, suggests a growing unease
about risk-taking and leverage in global financial markets.
The outbreak of schadenfreude -- that fantastic German
expression denoting malicious enjoyment in the misfortunes of
others -- is easy to explain. It rolls off those left behind at
the investment banks, prohibited from clambering onto the hedge-
fund bandwagon by spousal objections, personal risk aversion, or
a lack of acumen.
The traders at Goldman Sachs Group Inc., Deutsche Bank AG or
Morgan Stanley aren't necessarily earning less than their
freewheeling peers seeking safety in numbers in Greenwich,
Connecticut, or Mayfair, London.
They are, though, still working for The Man, rather than
seizing control of their own destinies with the power to choose
which breed of artwork adorns the walls and which brand of coffee
gets poured in the kitchenette. So the rubbernecking at the
Amaranth car-crash is understandable.
Morbid Fascination
There's a morbid fascination with what the hedge funds are
up to. In May 2005, junk credit ratings for Ford Motor Co. and
General Motors Corp. triggered unexpected dislocation in the
credit-derivatives market, prompting unfounded speculation that
one or many hedge funds were about to collapse.
It's almost as if people are willing more snakes to crawl
out of the lockers and baggage hold of the hedge-fund plane, to
test the claim that derivatives redistribute, rather than
exacerbate, risk.
Stress Test
It has been years since financial markets underwent a stress
test. The system easily withstood the terrorist attacks of Sept.
11 and Russia's default on $40 billion of debt in 1998. The
collapse of Long-Term Capital Management LP doesn't count; the
Federal Reserve skewed the outcome by twisting arms and banging
heads together to engineer a bailout.
The biggest crisis in recent years was probably in 1997,
when the devaluation of the Thai baht unleashed a wave of selling
that battered the currencies of Asia.
This week's military coup in Thailand, though, knocked just
1.2 percent off the value of that country's currency, leaving the
baht still up almost 9 percent against the dollar this year and
making it the best performer among the 15 Asia-Pacific currencies
that Bloomberg tracks. U.S. Treasury Secretary Henry Paulson said
there was ``no spillover'' into other markets.
Investors ploughed $42.1 billion into hedge funds in the
second quarter, the most they have allocated since at least 2003,
according to figures compiled by Hedge Fund Research Inc. in
Chicago. Hedge-fund profits are declining because too much money
is chasing too few opportunities.
Hedge-fund returns have been about 7.5 percent this year,
according to an index of returns compiled by Credit Suisse Group
and Tremont Capital Management Inc. That's about the same as last
year, though down from 9.6 percent in 2004 and about half of the
returns posted in 2003.
Grading Managers
One consequence of Amaranth's passing is to highlight the
ineffectiveness of the proposed system for assigning credit
ratings to hedge-fund managers. The finest risk-management
systems that money can buy and the most rigorous internal
controls are no defense against betting the ranch and getting it
wrong, so it's hard to see what value the ratings can provide.
It will also prompt renewed calls for regulation. The U.S.
Securities and Exchange Commission is itching to enforce
transparency in the hedge-fund industry. In June, the agency's
attempt to impose random inspections and registration
requirements on managers was rejected by an appeals court.
Hot Assets
The way in which Amaranth lost money is also fueling
voyeurism, since it is unlikely to be the only hedge fund that
made big bets on energy prices. Along with commodities, energy
resources were touted all last year as the hot new asset class.
So with gold and copper down about 20 percent since May, oil
trading at $61 a barrel compared with more than $80 in July, and
the Reuters/Jefferies CRB Price Index down more than 17 percent
from its May peak, the ghoulish expectation is that someone,
somewhere is hurting just as much as Amaranth.
Many years ago, Spike Milligan wrote in a children's poem:
``Things that go bump in the night should not really give one a
fright. It's the hole in each ear that lets in the fear. That,
and the absence of light.''
The British comedian and writer may have summed up the
collective concern in financial markets about what's under the
hood of the hedge-fund juggernaut today.
source: bloomberg
Sept. 21 (Bloomberg) -- The game of ``fantasy headlines'' is
a popular journalistic pastime; which combination of nouns, names
and verbs would garner the most readers? It seems ``Hedge Fund
Collapses'' is the runaway winner, beating efforts that meld Sex,
Golf and Warren Buffett in barely credible assemblages.
The downfall of Amaranth Advisors LLC, which made a bad bet
on natural-gas prices that cost it about $4.6 billion this month,
is attracting enormous attention. The story was the most-read
article ever on Bloomberg News, beating the previous terrorism-
inspired record set in November 2001 by the crash of Flight 587
in New York.
Fear and schadenfreude are behind the curiosity in the
demise of a company most people had never heard of until this
month, and which even at its peak had only $9.2 billion under
management. The prurient interest in Amaranth, a second-tier
player in a $1.2 trillion industry, suggests a growing unease
about risk-taking and leverage in global financial markets.
The outbreak of schadenfreude -- that fantastic German
expression denoting malicious enjoyment in the misfortunes of
others -- is easy to explain. It rolls off those left behind at
the investment banks, prohibited from clambering onto the hedge-
fund bandwagon by spousal objections, personal risk aversion, or
a lack of acumen.
The traders at Goldman Sachs Group Inc., Deutsche Bank AG or
Morgan Stanley aren't necessarily earning less than their
freewheeling peers seeking safety in numbers in Greenwich,
Connecticut, or Mayfair, London.
They are, though, still working for The Man, rather than
seizing control of their own destinies with the power to choose
which breed of artwork adorns the walls and which brand of coffee
gets poured in the kitchenette. So the rubbernecking at the
Amaranth car-crash is understandable.
Morbid Fascination
There's a morbid fascination with what the hedge funds are
up to. In May 2005, junk credit ratings for Ford Motor Co. and
General Motors Corp. triggered unexpected dislocation in the
credit-derivatives market, prompting unfounded speculation that
one or many hedge funds were about to collapse.
It's almost as if people are willing more snakes to crawl
out of the lockers and baggage hold of the hedge-fund plane, to
test the claim that derivatives redistribute, rather than
exacerbate, risk.
Stress Test
It has been years since financial markets underwent a stress
test. The system easily withstood the terrorist attacks of Sept.
11 and Russia's default on $40 billion of debt in 1998. The
collapse of Long-Term Capital Management LP doesn't count; the
Federal Reserve skewed the outcome by twisting arms and banging
heads together to engineer a bailout.
The biggest crisis in recent years was probably in 1997,
when the devaluation of the Thai baht unleashed a wave of selling
that battered the currencies of Asia.
This week's military coup in Thailand, though, knocked just
1.2 percent off the value of that country's currency, leaving the
baht still up almost 9 percent against the dollar this year and
making it the best performer among the 15 Asia-Pacific currencies
that Bloomberg tracks. U.S. Treasury Secretary Henry Paulson said
there was ``no spillover'' into other markets.
Investors ploughed $42.1 billion into hedge funds in the
second quarter, the most they have allocated since at least 2003,
according to figures compiled by Hedge Fund Research Inc. in
Chicago. Hedge-fund profits are declining because too much money
is chasing too few opportunities.
Hedge-fund returns have been about 7.5 percent this year,
according to an index of returns compiled by Credit Suisse Group
and Tremont Capital Management Inc. That's about the same as last
year, though down from 9.6 percent in 2004 and about half of the
returns posted in 2003.
Grading Managers
One consequence of Amaranth's passing is to highlight the
ineffectiveness of the proposed system for assigning credit
ratings to hedge-fund managers. The finest risk-management
systems that money can buy and the most rigorous internal
controls are no defense against betting the ranch and getting it
wrong, so it's hard to see what value the ratings can provide.
It will also prompt renewed calls for regulation. The U.S.
Securities and Exchange Commission is itching to enforce
transparency in the hedge-fund industry. In June, the agency's
attempt to impose random inspections and registration
requirements on managers was rejected by an appeals court.
Hot Assets
The way in which Amaranth lost money is also fueling
voyeurism, since it is unlikely to be the only hedge fund that
made big bets on energy prices. Along with commodities, energy
resources were touted all last year as the hot new asset class.
So with gold and copper down about 20 percent since May, oil
trading at $61 a barrel compared with more than $80 in July, and
the Reuters/Jefferies CRB Price Index down more than 17 percent
from its May peak, the ghoulish expectation is that someone,
somewhere is hurting just as much as Amaranth.
Many years ago, Spike Milligan wrote in a children's poem:
``Things that go bump in the night should not really give one a
fright. It's the hole in each ear that lets in the fear. That,
and the absence of light.''
The British comedian and writer may have summed up the
collective concern in financial markets about what's under the
hood of the hedge-fund juggernaut today.
source: bloomberg
09-25-2006, 04:44 PM
#6
I feel the need...
Thread Starter
^^ Did I mention that the trader responsible for the Amaranth debacle earned $75 to 100 million payday in 2005 according to Trader Monthly!!!
09-25-2006, 05:04 PM
#7
My Garage
Originally Posted by Fibonacci
^^ Did I mention that the trader responsible for the Amaranth debacle earned $75 to 100 million payday in 2005 according to Trader Monthly!!!
Trending Topics
08-16-2007, 04:11 PM
#8
I feel the need...
Thread Starter
Hedge-Fund Guy Atones for His Subprime Bond Sins
By Mark Gilbert Aug. 16 (Bloomberg)
http://www.bloomberg.com/apps/news?p...d=aO_Nh8kt4JgQ
Dear investor, we'd like to take this opportunity to update you on the recent performance of our hedge fund, Short-Term Capital Mismanagement LLP.
As you know, market selection for the entire fund is guided by a proprietary investing tool we like to call ``a dartboard.'' Once the asset classes are decided, individual security selections are generated by digitizing our unique hexagonal cuboid models.
Unfortunately, it transpires that our hexagonal cuboids are not as unique as we thought. Hundreds of other hedge funds possess identical dice. The technical term for this is a ``crowded trade.'' You may also see it referred to as ``climbing on a bandwagon already headed for the wall.''
As our alpha generation collapses, our beta has turned negative, our delta hedging has gone toxic and, trust me, you do not want to hear about our gamma. We can't even find our epsilons in the dark with both hands.
You will appreciate that accurate pricing is essential for evaluating our investment strategies. This has proven to be extremely challenging in recent days. Previously, we have relied on Bob, the sales guy at Hokey-Cokey Bank. Bob assured us the securities were still worth 100 percent of face value, so everything was cool. Bob sold the collateralized debt obligations to us in the first place, so he knows what he's talking about.
Bob, however, appears to have had a nervous breakdown, judging by the maniacal laughter that greeted our requests for price verification this week. Our efforts to implement an in- house CDO valuation framework, using a technique the ancients knew as ``making things up,'' proved unsatisfactory.....
As you know, market selection for the entire fund is guided by a proprietary investing tool we like to call ``a dartboard.'' Once the asset classes are decided, individual security selections are generated by digitizing our unique hexagonal cuboid models.
Unfortunately, it transpires that our hexagonal cuboids are not as unique as we thought. Hundreds of other hedge funds possess identical dice. The technical term for this is a ``crowded trade.'' You may also see it referred to as ``climbing on a bandwagon already headed for the wall.''
As our alpha generation collapses, our beta has turned negative, our delta hedging has gone toxic and, trust me, you do not want to hear about our gamma. We can't even find our epsilons in the dark with both hands.
You will appreciate that accurate pricing is essential for evaluating our investment strategies. This has proven to be extremely challenging in recent days. Previously, we have relied on Bob, the sales guy at Hokey-Cokey Bank. Bob assured us the securities were still worth 100 percent of face value, so everything was cool. Bob sold the collateralized debt obligations to us in the first place, so he knows what he's talking about.
Bob, however, appears to have had a nervous breakdown, judging by the maniacal laughter that greeted our requests for price verification this week. Our efforts to implement an in- house CDO valuation framework, using a technique the ancients knew as ``making things up,'' proved unsatisfactory.....
08-18-2007, 08:18 AM
#10
I feel the need...
Thread Starter
Blowing up the Lab on Wall Street
Looks like Wall Street's mad scientists have blown up the lab again. The subprime mess that is cutting so wide a swath through financial markets can be traced to the alchemy of creating collateralized debt obligations (CDOs) compounded by the enormous amount of leverage applied by big hedge funds. CDOs are derivatives — synthetic financial instruments derived from another asset.
http://www.time.com/time/business/ar...653556,00.html
http://www.time.com/time/business/ar...653556,00.html
08-20-2007, 02:14 PM
#11
How did this all come about? A (bearish) hedge-fund operator, in a letter to his investors, describes how a senior Wall Street marketing director recounted the genesis of the current situation:
"'Real money' (U.S. insurance companies, pension funds, etc.) accounts had stopped purchasing mezzanine tranches of U.S. subprime debt in late 2003 and [Wall Street] needed a mechanism that could enable them to 'mark up' these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!!
"He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the 'excess' pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt... until now."
These investors then had standing orders on Wall Street desks for any U.S. debt rated triple-A. Through the "alchemy of CDOs" and "the help of the ratings agencies," the CDO managers collected triple-B and triple-B-minus subprime and repackaged them so the top tier got paid out first. Then leverage the lower mezzanine tranches by 10-20 times and, "POOF... you magically have 80% of the structure rated 'AAA' by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets."
The letter concludes: "This will go down as one of the biggest financial illusions the world has EVER seen."
http://wcvarones.blogspot.com/2007/0...gage-mess.html
"'Real money' (U.S. insurance companies, pension funds, etc.) accounts had stopped purchasing mezzanine tranches of U.S. subprime debt in late 2003 and [Wall Street] needed a mechanism that could enable them to 'mark up' these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!!
"He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the 'excess' pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt... until now."
These investors then had standing orders on Wall Street desks for any U.S. debt rated triple-A. Through the "alchemy of CDOs" and "the help of the ratings agencies," the CDO managers collected triple-B and triple-B-minus subprime and repackaged them so the top tier got paid out first. Then leverage the lower mezzanine tranches by 10-20 times and, "POOF... you magically have 80% of the structure rated 'AAA' by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets."
The letter concludes: "This will go down as one of the biggest financial illusions the world has EVER seen."
http://wcvarones.blogspot.com/2007/0...gage-mess.html
03-10-2008, 06:44 PM
#12
I feel the need...
Thread Starter
Hedge Funds Reel From Margin Calls Even on Treasuries
The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States.
Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.
While lenders are most unsettled by credit consisting of real estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasuries, considered the world's safest securities, because of the price fluctuations in the bond market.
``If you have leverage, you're stuffed,'' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back.
The lending crackdown is the worst to hit the $1.9 trillion hedge-fund industry since Russia's debt default in 1998 roiled global credit markets and required the U.S. Federal Reserve to pressure the securities industry to arrange a $3.6 billion bailout of Greenwich, Connecticut-based Long-Term Capital Management LP. Today, hedge funds are being forced to sell assets to meet banks' margin calls, resulting in the dissolution of the funds.....
Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.
While lenders are most unsettled by credit consisting of real estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasuries, considered the world's safest securities, because of the price fluctuations in the bond market.
``If you have leverage, you're stuffed,'' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back.
The lending crackdown is the worst to hit the $1.9 trillion hedge-fund industry since Russia's debt default in 1998 roiled global credit markets and required the U.S. Federal Reserve to pressure the securities industry to arrange a $3.6 billion bailout of Greenwich, Connecticut-based Long-Term Capital Management LP. Today, hedge funds are being forced to sell assets to meet banks' margin calls, resulting in the dissolution of the funds.....
Teh Great Unwinding....
03-13-2008, 06:17 PM
#14
I feel the need...
Thread Starter
Carlyle Capital Nears Collapse as Rescue Talks Fail
Carlyle Group said creditors plan to seize the assets of its mortgage-bond fund after it failed to meet more than $400 million of margin calls on mortgage- backed collateral that plunged in value.
Carlyle Capital Corp., which began to buckle a week ago from the strain of shrinking home-loan assets, said in a statement it defaulted on about $16.6 billion of debt as of yesterday. The dollar fell to a 12-year low against the yen and European stocks tumbled.
The fund fell 87 percent in Amsterdam trading. Carlyle Group, co-founded by David Rubenstein, tapped public markets for $300 million in July to fuel the fund just as rising foreclosures caused credit markets to seize up. In the past month, managers led by Peloton Partners LLP have closed at least a dozen funds, sold assets or sought fresh capital as banks tightened lending standards.....
Carlyle Capital Corp., which began to buckle a week ago from the strain of shrinking home-loan assets, said in a statement it defaulted on about $16.6 billion of debt as of yesterday. The dollar fell to a 12-year low against the yen and European stocks tumbled.
The fund fell 87 percent in Amsterdam trading. Carlyle Group, co-founded by David Rubenstein, tapped public markets for $300 million in July to fuel the fund just as rising foreclosures caused credit markets to seize up. In the past month, managers led by Peloton Partners LLP have closed at least a dozen funds, sold assets or sought fresh capital as banks tightened lending standards.....
08-22-2008, 08:35 PM
#15
I feel the need...
Thread Starter
Hedge Fund Outlook Is `Much Worse' Than 1998, LTCM Veteran Says
The $1.9 trillion hedge fund industry, mired in its worst performance in two decades, faces ``much worse'' conditions than in 1998, when Long-Term Capital Management LP collapsed, a veteran of that fund said.
``It's definitely a trickier environment,'' said Hans Hufschmid, chief executive officer of GlobeOp Financial Services LP, and a former partner at LTCM and co-head of its London office. ``The market is much worse that it was in 1998. Then it was just LTCM, but this impacts everybody.''
Hedge funds are concerned for the first time about risks related to prime brokers after Bear Stearns Cos.' forced merger with JPMorgan Chase & Co., said Hufschmid, 52, whose London-based company is administrator to funds managing about $104 billion.
Banks and brokerages have written down $495 billion and raised $356 billion in capital since the start of 2007 as the U.S. subprime mortgage market collapsed. Banks' increasing reluctance to lend has hurt hedge-fund operations, Hufschmid said in a telephone interview yesterday.
``Hedge funds live on credit and leverage and the ability to finance esoteric positions for a long time,'' said Hufschmid. ``To the extent liquidity is drying up as it is now, that becomes more difficult.''
Greenwich, Connecticut-based LTCM leveraged $2.3 billion of capital into holdings of about $125 billion before its collapse, which roiled financial markets and led to a bailout organized by the Federal Reserve. The company lost $4.6 billion and received a $3.5 billion bailout from 14 lenders in 1998.
July ranks among the worst months of performance for hedge funds. Chicago-based Hedge Fund Research Inc.'s Weighted Composite Index, based on data from more than 2,000 funds, fell 2.4 percent in the month and is down 3.5 percent year-to-date, which would be the worst annual performance since at least 1990.....
``It's definitely a trickier environment,'' said Hans Hufschmid, chief executive officer of GlobeOp Financial Services LP, and a former partner at LTCM and co-head of its London office. ``The market is much worse that it was in 1998. Then it was just LTCM, but this impacts everybody.''
Hedge funds are concerned for the first time about risks related to prime brokers after Bear Stearns Cos.' forced merger with JPMorgan Chase & Co., said Hufschmid, 52, whose London-based company is administrator to funds managing about $104 billion.
Banks and brokerages have written down $495 billion and raised $356 billion in capital since the start of 2007 as the U.S. subprime mortgage market collapsed. Banks' increasing reluctance to lend has hurt hedge-fund operations, Hufschmid said in a telephone interview yesterday.
``Hedge funds live on credit and leverage and the ability to finance esoteric positions for a long time,'' said Hufschmid. ``To the extent liquidity is drying up as it is now, that becomes more difficult.''
Greenwich, Connecticut-based LTCM leveraged $2.3 billion of capital into holdings of about $125 billion before its collapse, which roiled financial markets and led to a bailout organized by the Federal Reserve. The company lost $4.6 billion and received a $3.5 billion bailout from 14 lenders in 1998.
July ranks among the worst months of performance for hedge funds. Chicago-based Hedge Fund Research Inc.'s Weighted Composite Index, based on data from more than 2,000 funds, fell 2.4 percent in the month and is down 3.5 percent year-to-date, which would be the worst annual performance since at least 1990.....
08-23-2008, 10:37 AM
#16
dɐɹɔ ǝɥʇ ʇɐɥʍ
I realize some of these articles are a number of years old, which makes it even more entertaining to read them now. I particularly liked the first sentence of the first article, who gives a rats ass what the Federal Reserve thinks, they are more corrupt then anyone else mentioned in this article. As it is said, they are as "Federal" as Federal Express, they are a privately owned monopoly that cares nothing else besides profit.The real kick in the pants is due to all of this, a small timer like myself can't easily get the licensing I need from the SEC with out literally spending millions - I guess I'll just take care of myself and ignore those who I could help.
09-07-2008, 07:36 PM
#17
I feel the need...
Thread Starter
Long-Term Capital: It’s a Short-Term Memory
A FINANCIAL firm borrows billions of dollars to make big bets on esoteric securities. Markets turn and the bets go sour. Overnight, the firm loses most of its money, and Wall Street suddenly shuns it. Fearing that its collapse could set off a full-scale market meltdown, the government intervenes and encourages private interests to bail it out.
The firm isn’t Bear Stearns — it was Long-Term Capital Management, the hedge fund based in Greenwich, Conn., and the rescue occurred 10 years ago this month.
The Long-Term Capital fiasco momentarily shocked Wall Street out of its complacent trust in financial models, and was replete with lessons, for Washington as well as for Wall Street. But the lessons were ignored, and in this decade, the mistakes were repeated with far more harmful consequences. Instead of learning from the past, Wall Street has re-enacted it in larger form, in the mortgage debacle cum credit crisis.....
The firm isn’t Bear Stearns — it was Long-Term Capital Management, the hedge fund based in Greenwich, Conn., and the rescue occurred 10 years ago this month.
The Long-Term Capital fiasco momentarily shocked Wall Street out of its complacent trust in financial models, and was replete with lessons, for Washington as well as for Wall Street. But the lessons were ignored, and in this decade, the mistakes were repeated with far more harmful consequences. Instead of learning from the past, Wall Street has re-enacted it in larger form, in the mortgage debacle cum credit crisis.....
09-22-2008, 07:13 PM
#18
I feel the need...
Thread Starter
Now Uncle Sam Is Hedge-Fund Guy, AAA Needs Review
As Uncle Sam transmogrifies into Hedge-Fund Guy, gorging on debt to buy $700 billion of toxic assets to keep the financial system afloat, the U.S. government's AAA status has to be deemed unsafe. It just has to.
In any possible universe, that grade becomes questionable once the U.S. financial situation changes as radically as it has in recent weeks. So far, though, it isn't even under review by the rating companies.
That's a mistake. As flawed as Moody's Investors Service, Standard & Poor's and Fitch Ratings are, there is no way they would allow a company to undergo the philosophical, financial and ethical contortions that the U.S. has endured without a re- evaluation of creditworthiness.
The U.S. is fast becoming the world's biggest sovereign wealth fund. It owns a couple of mortgage lenders in Fannie Mae and Freddie Mac; it controls American International Group Inc., which turned out to be a dodgy derivatives shop that dabbled in insurance; and it has a $29 billion stake in brokerage firm Bear Stearns Cos., the adopted wild-child of JPMorgan Chase & Co.
Now, the U.S. plans to set up a special fund to buy the distressed assets that the finance industry loaded up on when hubris was still in fashion. Those securities turned out to be pure poison as soon as anyone bothered to look inside the derivatives boxes to see what they were really made of.....
In any possible universe, that grade becomes questionable once the U.S. financial situation changes as radically as it has in recent weeks. So far, though, it isn't even under review by the rating companies.
That's a mistake. As flawed as Moody's Investors Service, Standard & Poor's and Fitch Ratings are, there is no way they would allow a company to undergo the philosophical, financial and ethical contortions that the U.S. has endured without a re- evaluation of creditworthiness.
The U.S. is fast becoming the world's biggest sovereign wealth fund. It owns a couple of mortgage lenders in Fannie Mae and Freddie Mac; it controls American International Group Inc., which turned out to be a dodgy derivatives shop that dabbled in insurance; and it has a $29 billion stake in brokerage firm Bear Stearns Cos., the adopted wild-child of JPMorgan Chase & Co.
Now, the U.S. plans to set up a special fund to buy the distressed assets that the finance industry loaded up on when hubris was still in fashion. Those securities turned out to be pure poison as soon as anyone bothered to look inside the derivatives boxes to see what they were really made of.....
10-23-2008, 06:58 PM
#19
I feel the need...
Thread Starter
Roubini Says `Panic' May Force Market Shutdown
Hundreds of hedge funds will fail and policy makers may need to shut financial markets for a week or more as the crisis forces investors to dump assets, New York University Professor Nouriel Roubini said.
``We've reached a situation of sheer panic,'' Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. ``There will be massive dumping of assets'' and ``hundreds of hedge funds are going to go bust,'' he said.
Group of Seven policy makers have stopped short of market suspensions to stem the crisis after the U.S. pledged on Oct. 14 to invest about $125 billion in nine banks and the Federal Reserve led a global coordinated move to cut interest rates on Oct. 8. Emmanuel Roman, co-chief executive officer at GLG Partners Inc., said today that as many as 30 percent of hedge funds will close.
``Systemic risk has become bigger and bigger,'' Roubini said at the Hedge 2008 conference. ``We're seeing the beginning of a run on a big chunk of the hedge funds,'' and ``don't be surprised if policy makers need to close down markets for a week or two in coming days,'' he said.
Roubini predicted in July 2006 that the U.S. would enter an economic recession. In February this year, he forecast a ``catastrophic'' financial meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks exposed to mortgages and a ``sharp drop'' in equities.....
``We've reached a situation of sheer panic,'' Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. ``There will be massive dumping of assets'' and ``hundreds of hedge funds are going to go bust,'' he said.
Group of Seven policy makers have stopped short of market suspensions to stem the crisis after the U.S. pledged on Oct. 14 to invest about $125 billion in nine banks and the Federal Reserve led a global coordinated move to cut interest rates on Oct. 8. Emmanuel Roman, co-chief executive officer at GLG Partners Inc., said today that as many as 30 percent of hedge funds will close.
``Systemic risk has become bigger and bigger,'' Roubini said at the Hedge 2008 conference. ``We're seeing the beginning of a run on a big chunk of the hedge funds,'' and ``don't be surprised if policy makers need to close down markets for a week or two in coming days,'' he said.
Roubini predicted in July 2006 that the U.S. would enter an economic recession. In February this year, he forecast a ``catastrophic'' financial meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks exposed to mortgages and a ``sharp drop'' in equities.....
09-19-2009, 05:20 AM
#20
I feel the need...
Thread Starter
Hedge Funds’ ATM Moves From Tokyo to Washington
China is getting all worked up about the wrong thing when it comes to the U.S.
Forget these nascent trade wars over tires, cars and chickens. China’s real problem is how quickly the dollars they hold in great quantity are getting all the respect of pesos these days. Sound like hyperbole? Not when you consider what may be the hottest investment of 2010: the dollar-carry trade.
Move over Japan. Investors spent a decade borrowing in zero-interest-rate yen and putting the funds in higher-yielding assets overseas. It’s the U.S.’s turn to flood the world with cheap funding and the risks of this going wrong are huge.
The carry trade has never been a proud part of Japan’s post-bubble years. Officials in Tokyo rarely talk about the yen’s role in funding risky or highly leveraged bets on markets from Zimbabwe to New Zealand. Japan never set out to become a giant automated teller machine for speculators. It was a side effect of policies aimed at ending deflation.
The perils of the carry trade were seen in October 1998. Russia’s debt default and the implosion of Long-Term Capital Management LP devastated global markets. It was a decidedly panicky and messy period culminating in the yen, which had been weakening for years, surging 20 percent in less than two months.
Now imagine what might happen if the world’s reserve currency became its most shorted. Carry trades are, after all, bets that the funding currency will weaken further or stay down for an extended period of time. It’s also a wager that a central bank is trapped into keeping borrowing costs low indefinitely.....
Forget these nascent trade wars over tires, cars and chickens. China’s real problem is how quickly the dollars they hold in great quantity are getting all the respect of pesos these days. Sound like hyperbole? Not when you consider what may be the hottest investment of 2010: the dollar-carry trade.
Move over Japan. Investors spent a decade borrowing in zero-interest-rate yen and putting the funds in higher-yielding assets overseas. It’s the U.S.’s turn to flood the world with cheap funding and the risks of this going wrong are huge.
The carry trade has never been a proud part of Japan’s post-bubble years. Officials in Tokyo rarely talk about the yen’s role in funding risky or highly leveraged bets on markets from Zimbabwe to New Zealand. Japan never set out to become a giant automated teller machine for speculators. It was a side effect of policies aimed at ending deflation.
The perils of the carry trade were seen in October 1998. Russia’s debt default and the implosion of Long-Term Capital Management LP devastated global markets. It was a decidedly panicky and messy period culminating in the yen, which had been weakening for years, surging 20 percent in less than two months.
Now imagine what might happen if the world’s reserve currency became its most shorted. Carry trades are, after all, bets that the funding currency will weaken further or stay down for an extended period of time. It’s also a wager that a central bank is trapped into keeping borrowing costs low indefinitely.....
Do you guys remember when Greenspan made his "conundrum" comment a few years back when he was increasing the Fed Funds rate from 1% up to 5.25 starting in '03 in the aftermath of the tech wreck? He was confounded by the corresponding lack of movement in the long part of the benchmark yield curve to a normalized levels. US bonds were the beneficiary of the carry trade which allowed the housing bubble to foment.
Man, these next few years are going to be awfully interesting. We are truly in uncharted territory.
09-22-2009, 07:26 PM
#21
I feel the need...
Thread Starter
Hedge Funds, Historians Are Winners of Recession
That’s it, then. The global recession is over. At least that’s what Federal Reserve Chairman Ben Bernanke says.
Answering questions last week, the world’s most powerful central banker said the U.S. recession was “very likely over at this point.” Much the same story is being played out in the rest of the world, with the German, French and even U.K. economies gradually recovering from their own slumps.
And yet the biggest shock to the global financial system since the 1930s won’t just leave us with a legacy of lost output and higher unemployment. The recession will reshape the way we think about the economy for a generation. Over time, we will see that the credit crunch caused shifts of power and influence between industries, professions and countries.
So who are the winners and losers from the recession? Here are five places to start: Historians have triumphed over economists; hedge funds over bankers; Germany over Britain; the right over the left; and the frugal over the spendthrift.....
Answering questions last week, the world’s most powerful central banker said the U.S. recession was “very likely over at this point.” Much the same story is being played out in the rest of the world, with the German, French and even U.K. economies gradually recovering from their own slumps.
And yet the biggest shock to the global financial system since the 1930s won’t just leave us with a legacy of lost output and higher unemployment. The recession will reshape the way we think about the economy for a generation. Over time, we will see that the credit crunch caused shifts of power and influence between industries, professions and countries.
So who are the winners and losers from the recession? Here are five places to start: Historians have triumphed over economists; hedge funds over bankers; Germany over Britain; the right over the left; and the frugal over the spendthrift.....
02-10-2010, 06:45 PM
#22
I feel the need...
Thread Starter
Citadel’s Griffin Skirts Disaster, Taleb Fumes
On Aug. 7, 2007, Matthew Rothman of Lehman Brothers Holdings Inc. got off a red-eye flight in San Francisco and went to see a potential client.
“Oh my God, Matthew,” the frantic trader said, pulling Rothman toward his office. “Have you seen what’s going on?”
His portfolio had plunged, and the bloodletting continued as Rothman visited other quant funds that Tuesday, writes Scott Patterson in his sometimes overheated yet valuable book, “The Quants.” Rothman, a quantitative strategist, was baffled.
“Events that models only predicted would happen once in 10,000 years happened every day for three days,” he said after writing a report called “Turbulent Times in Quant Land.”
Suddenly, the quant math didn’t add up.
The rise of quantitative investing is one of the great financial developments of our times. Equipped with advanced degrees and superfast computers, quants revolutionized Wall Street. They also hastened meltdowns ranging from Black Monday in 1987 to the collapse of Long-Term Capital Management LP in 1998 and the Great Credit Crackup of 2007.....
“Oh my God, Matthew,” the frantic trader said, pulling Rothman toward his office. “Have you seen what’s going on?”
His portfolio had plunged, and the bloodletting continued as Rothman visited other quant funds that Tuesday, writes Scott Patterson in his sometimes overheated yet valuable book, “The Quants.” Rothman, a quantitative strategist, was baffled.
“Events that models only predicted would happen once in 10,000 years happened every day for three days,” he said after writing a report called “Turbulent Times in Quant Land.”
Suddenly, the quant math didn’t add up.
The rise of quantitative investing is one of the great financial developments of our times. Equipped with advanced degrees and superfast computers, quants revolutionized Wall Street. They also hastened meltdowns ranging from Black Monday in 1987 to the collapse of Long-Term Capital Management LP in 1998 and the Great Credit Crackup of 2007.....
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