A Funeral And Hedge Fund Falls….more to Come?

Greetings from El Paso, TX….

I attended a funeral today. The funeral was for “Grandma V” and I got to see family I had not seen in a long time. It will probably be a long time before I see them again. But….the funeral “got me to think’n.” No…I was not asking myself “what is the meaning of life?” But I was asking myself a question that was just as deep.

Several of the family members were getting up to the podium to speak of their favorite memories of “Grandma V.” As each family member spoke, I asked myself “how do I want to be remembered?” This question set me up for more questions.

I first started thinking of how I wanted to be remembered….then I thought….”Am I doing the things today that will create the memories that I want my family members, my friends, my students, my clients, and my readers to have of me when I am gone? Deep huh? Well…I will talk more about that on my next blog….

A HEDGE FUND DIES…..are there more to come?

I caught an interesting headline on my google home page (I was actually wondering “when” not “if” this would happen) “A hedge fund crashes.” Now…I am wondering….how many more will follow. I think this quote from the article sums things up very well…

“Rate cuts from the Federal Reserve have yet to solve the problem and, as long as the fundamentals of the American housing market keep deteriorating, there may be more Peloton-style calamities to come.”

Opportunities for investors coming? I think so. You can read below to get the whole story….or just follow this link: Hedge Fund Crashes ….Until next time…..

Peloton runs out of road

Feb 29th 2008
From Economist.com

A hedge fund is unsaddled

AFTER hubris comes nemesis. On January 24th more than 1,000 leading figures in the European hedge-fund industry gathered for a dinner at the swanky Grosvenor House hotel on London’s Park Lane to witness the EuroHedge awards for 2007. Out of the 20 awards, two—credit fund of the year and new fund of the year (for non-equity strategies)—were awarded to Peloton Partners, a credit manager set up by ex-Goldman Sachs employees in 2005.But Peloton (the word is related to platoon and refers to the pack of riders in a cycle race) had already hit a sizeable pothole. On Thursday, just five weeks after being honoured with the awards, the fund’s founders, Ron Beller and Geoffrey Grant, were forced to send letters (see link) to investors explaining that they were suspending redemptions from the fund.Ironically this failure stemmed from following the same strategy that had brought the fund such success. Peloton was invested in the murky world of mortgage-backed securities. It earned 87% in 2007 by buying the most senior AAA-rated securities and short selling (ie, betting on a fall) the riskiest securities, rated BBB- or below.

The strategy worked brilliantly in the first stages of the subprime crisis. Alas, the crisis has not gone away and defaults continued at a higher rate than expected. Other investors decided to exit from the sector and that meant a sell off of the most liquid securities, the AAA types that Peloton owned. This was happening even as Peloton was accepting the industry’s gongs. Undaunted, the managers took the view that this selling was overdone and thus took a long position through the index of asset-backed securities, know as the ABX.

Alas, the selling continued and Peloton’s position in the ABX also lost money. At this point, the danger that faces all hedge funds started to kick in. The banks and prime brokers that financed the fund required it to put up more margin payments on its losing positions. This was hardly surprising; the banks were already nervous about their existing exposure to mortgage credit.

Although Peloton did not have anything like the debt levels (it was 4.5 times geared on $2 billion of assets) of Long-Term Capital Management, a fund that imploded in 1998, it faced a similar scenario. It was forced to sell assets into an illiquid market, forcing prices down further and weakening its net asset value. When it sought new capital injections, that only advertised its problems and the market moved decisively against it. As recently as last weekend, there were hopes of a rescue package but not all the creditors could be persuaded to sign up.

The portfolio will now be wound up and hopes are not high for Peloton’s other fund, a $1.6 billion multi-strategy vehicle that had around 40% of its assets in the credit fund. A similar fate faces Sailfish Capital Partners, a Connecticut-based credit fund that was also founded in 2005.

The sorry saga illustrates two problems. The first is that those who live by leverage can die by it too. Some hedge fund investors deliberately steer clear of funds that earn 87% returns; they prefer those who aim for a steadier 10-12%. The second problem is that, a year after subprime defaults first became widely publicised, the credit crunch is still intense. Rate cuts from the Federal Reserve have yet to solve the problem and, as long as the fundamentals of the American housing market keep deteriorating, there may be more Peloton-style calamities to come.