Bambo, Belize
I’ve set up a dedicated web site to store photos and other stuff for my cohort at Wharton. Email me for the login information if you’re interested - I’ll probably post photos from school on the new website instead of this one. The web site is www.cohortC.com.
I’ve been discovering Daniel Loeb’s hysterical letters via Paul Kedrosky. It’s a nice break from abstract textbook jargon. Check out this open letter (actually an SEC filing) to Irik Sevin, the CEO of StarGas (where Daniel Loeb’s fund has a 6% stake):
Sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders. A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America. (I was amused to learn, in the course of our investigation, that at Cornell University there is an “Irik Sevin Scholarship.” One can only pity the poor student who suffers the indignity of attaching your name to his academic record.)
From the same letter:
The Company’s Code of Conduct and Ethics also clearly states under the section
on Conflics of Interest, that…[boilerplate policy about conflicts of interest]By this clearly stated policy, how is it possible that you selected your elderly
78-year old mom to serve on the Company’s Board of Directors and as a full-time
employee providing employee and unitholder services? We further wonder under
what theory of corporate governance does one’s mom sit on a Company board.
Should you be found derelict in the performance of your executive duties, as we
believe is the case, we do not believe your mom is the right person to fire you
from your job. We are concerned that you have placed your greed and desire to
supplement your family income - through the director’s fees of $27,000 and your
mom’s $199,000 base salary - ahead of the interests of unitholders. We insist
that your mom resign immediately from the Company’s board of directors.
From the NY Times:
By Mr. Lo’s measures, hedge fund investments are less liquid now than they have been in 20 years. His work shows that the same pattern of investing preceded the 1998 global hedge fund meltdown and the 1987 stock market crash.
But that’s not the only reason for worry. He says that crises like that of 1998 may be more predictable than was previously thought - and that another crisis is likely.
The 1998 panic is generally thought to have been set off by the Russian government’s default on its debt. But Mr. Lo points out that only a minuscule proportion of the world’s hedge fund investments were in Russian government bonds.
In his paper, he shows that the catastrophic losses of 1998 were preceded by a noticeable series of months of mediocre performance. Mr. Lo argues that while a hedge fund crisis appears to be sudden and to be caused by unforeseen events, the breakdown is only the late stage of the problem. As more hedge funds compete for the same slice of the pie, he says, their managers feel that they have no choice but to “leverage up,” juicing their returns by borrowing more money to make bigger investments.
I need to read the paper to find out how he substantiates the claim that hedge funds are less liquid today than for the past two decades; having said that it makes a lot of sense that as alpha is competed away managers will leverage up to maintain returns. Also note the inherent risk asymmetry for hedge fund managers; hitting home runs makes them tons of money while blowing up the fund only results in the loss of a job (their payout looks like a long call option). Hedge fund buyers, on the other hand, get a payout that looks like repeated selling of puts; long periods of steady profitability punctuated by occasional disasters (see this ppt). The concepts aren’t rocket science but trying to quantify the problem is quite difficult. From the article:
Mr. Lo refers to some of his research as “measuring how strong the camel’s back is and how much straw is already on it,”
At the risk of getting out of my depth, I loosely monitor the VIX and credit spread to see how much money may be chasing short term returns at the expense of a blowup. This graph is from PIMCO:
