Hedge fund loses 99.8% of all funds, $100m down to $200k.

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Day9
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Hedge fund loses 99.8% of all funds, $100m down to $200k.

Post by Day9 »

The manager is "truly sorry".

"[The manager] said in the letter that he made a series of "aggressive transactions" over the last three weeks to make up for poor returns in December. He said he bet on stock price options, predicated on the broader market rising. But stock indexes fell, causing the huge losses"

http://www.cnbc.com/id/102356275

I think there is a lesson here about market timing, risk management, and the validity of the notion that "you get what you pay for" with high price fund managers.
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PugetSoundguy
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by PugetSoundguy »

I wonder if the manager got his 2% of the $100 million or $200k? I think I know the answer.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by InvestorNewb »

Wow. How can someone lose that much money? That's insane.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Jeff7 »

InvestorNewb wrote:Wow. How can someone lose that much money? That's insane.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Trevor »

"Oops."
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by toto238 »

Classic principal-agent problem.

Manager already had a very bad December. So much so, that his career was likely going to take a very hard hit. It was perfectly rational for the manager to bet it all, double-or-nothing. If he won, he would look like a genius and all would be forgiven. If he was wrong, well he was already in a heap of trouble. Now he's just in a touch bit more trouble.

Who was it that said someone is naturally willing to take more risk with someone else's money than with their own?
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by AZAttorney11 »

The lawyers are circling...

They could bet the entire $200,000 on a single number in roulette, win, and they would still be $93,000,000 short.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by zaboomafoozarg »

In other news, "hedge-fund hotshot made $1B betting on oil": http://nypost.com/2015/01/21/this-hedge ... oil-crash/

If the manager who lost 99.8% of his fund would have guessed correctly, he too would likely be considered a hotshot right now.

This is why I am skeptical of hotshots. It's very hard to know if they have real skill or insight that will persist... or if they just made a lucky guess.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by adamthesmythe »

That is a truly impressive loss. Somebody has to be at the end of the tail, and he's the one.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by bpp »

We'll have to see if he can duplicate this performance before we can determine whether it is luck or skill.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Valuethinker »

zaboomafoozarg wrote:In other news, "hedge-fund hotshot made $1B betting on oil": http://nypost.com/2015/01/21/this-hedge ... oil-crash/

If the manager who lost 99.8% of his fund would have guessed correctly, he too would likely be considered a hotshot right now.

This is why I am skeptical of hotshots. It's very hard to know if they have real skill or insight that will persist... or if they just made a lucky guess.
http://www.bloomberg.com/apps/news?pid= ... JS57CQQbeE

indeed. Amaranth lost $6.6bn betting natural gas prices would rise.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Valuethinker »

toto238 wrote:Classic principal-agent problem.

Manager already had a very bad December. So much so, that his career was likely going to take a very hard hit. It was perfectly rational for the manager to bet it all, double-or-nothing. If he won, he would look like a genius and all would be forgiven. If he was wrong, well he was already in a heap of trouble. Now he's just in a touch bit more trouble.

Who was it that said someone is naturally willing to take more risk with someone else's money than with their own?
Liar's Poker (Salomon, 1980s) and When Genius Failed (LTCM 1990s) have some great examples of this.

You see corporate execs do it to with the 'transformative' big takeover or corporate move.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Valuethinker »

bpp wrote:We'll have to see if he can duplicate this performance before we can determine whether it is luck or skill.
There is persistence in bad fund performance. Logically that means good fund performance should also be persistent, but that doesn't seem to be as true.

There really are fund managers who always underperform.

http://www.morningstar.co.uk/uk/funds/s ... F0GBR04RQG

Manek was a pharmacist who won a Sunday Times stockpicking competition, and has been underperforming basically ever since. An unerring ability to pick companies that are going off the boil (the internet fashion retailer ASOS for example is a major fund holding).
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by MN-Investor »

I always found it interesting that hedge funds were not more regulated based on the theory that their investors were sophisticated and more knowledgeable.

I'm out of the loop as far as hedge funds. How does one even find one to invest in? Do they have internet sites? Do they beat the bushes looking for $10 million investors?
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by LateStarter1975 »

Check out the comments to the original article. They're hilarious and made my day
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choices
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by choices »

Chill, guys! He said he was sorry. I mean it coulda happened to any of us if someone was silly enough to entrust us with all that money, right?
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by camden »

Every time one of these hedge fund stories comes out, it reinforces my sense of astonishment that anyone invests their money in them.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by z3r0c00l »

choices wrote:Chill, guys! He said he was sorry. I mean it coulda happened to any of us if someone was silly enough to entrust us with all that money, right?
: ) My investments would have returned 15% last year with very little risk and all for a low low fee of 1% over ER.

A very informative filing here:

http://www.sec.gov/Archives/edgar/data/ ... ry_doc.xml
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BabylonOrBust
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by BabylonOrBust »

Thinking they could find Alpha, they found Omega.

I'm finding myself unable to have sympathy for anyone involved...
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by staythecourse »

toto238 wrote:Classic principal-agent problem.

Manager already had a very bad December. So much so, that his career was likely going to take a very hard hit. It was perfectly rational for the manager to bet it all, double-or-nothing. If he won, he would look like a genius and all would be forgiven. If he was wrong, well he was already in a heap of trouble. Now he's just in a touch bit more trouble.

Who was it that said someone is naturally willing to take more risk with someone else's money than with their own?
I, personally, do not blame the hedge fund manager. He did what was best for him. He runs a hedge fund so don't think there is a prudent man's rule or fudiciary standard like for a RIA. The bigger issue, in general, is investors not understanding you have to find what Mr. Swensen made famous for describing as "Alignment of Interest", i.e. tugging on the same side of the rope.

The basic concept is any situation where the manager makes money no matter what (limited downside risk) and you only make money when it does well with unlimited risk (going broke) you have a serious problem with alignment of interest.

In the end this is why in the late Harry Browne often would say one should keep as few as people from your money and you as possible.

Good luck.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Trevor »

camden wrote:Every time one of these hedge fund stories comes out, it reinforces my sense of astonishment that anyone invests their money in them.

What about these kinds of stories:
zaboomafoozarg wrote:In other news, "hedge-fund hotshot made $1B betting on oil": http://nypost.com/2015/01/21/this-hedge ... oil-crash/
WWJD - What Would Jack Do?
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Quickfoot »

It's possible people could have been invested without knowing it, hedge funds typically have pretty high minimum investments and the people that can meet them tend not to manage their own money. More than one person's job is probably going to be impacted by this loss.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by parsi1 »

why would anyone trust their money with the former trader at Raj Rajaratnam's company?
May be they were aware to the risk and aiming too high.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by toto238 »

staythecourse wrote:
toto238 wrote:Classic principal-agent problem.

Manager already had a very bad December. So much so, that his career was likely going to take a very hard hit. It was perfectly rational for the manager to bet it all, double-or-nothing. If he won, he would look like a genius and all would be forgiven. If he was wrong, well he was already in a heap of trouble. Now he's just in a touch bit more trouble.

Who was it that said someone is naturally willing to take more risk with someone else's money than with their own?
I, personally, do not blame the hedge fund manager. He did what was best for him. He runs a hedge fund so don't think there is a prudent man's rule or fudiciary standard like for a RIA. The bigger issue, in general, is investors not understanding you have to find what Mr. Swensen made famous for describing as "Alignment of Interest", i.e. tugging on the same side of the rope.

The basic concept is any situation where the manager makes money no matter what (limited downside risk) and you only make money when it does well with unlimited risk (going broke) you have a serious problem with alignment of interest.

In the end this is why in the late Harry Browne often would say one should keep as few as people from your money and you as possible.

Good luck.
Yeah honestly the manager acted in his own rational self-interest. From his perspective, nothing he did was unreasonable. Immoral? Sure. But not irrational. He followed his self-interest to the letter.

Makes you kinda worried about those that advocate for a society run 100% on nothing but self-interest.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by adamthesmythe »

>why would anyone trust their money with the former trader at Raj Rajaratnam's company?

Apparently he was not implicated in the insider trading.

So at least he lost the money honestly?
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by z3r0c00l »

parsi1 wrote:why would anyone trust their money with the former trader at Raj Rajaratnam's company?
May be they were aware to the risk and aiming too high.
Right, it is likely that the whole lot were rotten and operating on the edge (or beyond) of ethics and law. Should not be too shocking that this fund went bust also.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by clast »

Someone send him a copy of The Boglehead's Guide to Investing
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by sunnywindy »

Reminds me of when a roommate gave me $20 to gamble in Las Vegas (1994 - I was driving through on a ski trip and was showing a Brazilian the sights of the West). He said, "Go make me some money." I said, "You are really giving me money to gamble?" So, I went to a table (I don't remember which game as I hate gambling and Las Vegas) and won $5 so I was up to $30. Then I gambled $10 three times and lost all the money.

Back home my roommate eagerly waited for me to see how rich he had become. I said I lost all your money (I was not sorry like the hedge fund manager)....and he was actually a little bit mad at me!!!
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by nisiprius »

MN-Investor wrote:I always found it interesting that hedge funds were not more regulated based on the theory that their investors were sophisticated and more knowledgeable.

I'm out of the loop as far as hedge funds. How does one even find one to invest in? Do they have internet sites? Do they beat the bushes looking for $10 million investors?
The rules have been changed to allow them to advertise to retail investors, though so far few have taken advantage of it. Oh, and they are now allowed to accept $1 million investors.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by bhsince87 »

On the other side of his trades, SOMEBODY made some money.

And now they can tell their clients, "See, WE know how to beat the market!"
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Random Musings »

As Bluto would say to those investors:

"My advise to you is to start drinking heavily".

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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by The Wizard »

It's only money, no problem...
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by saltycaper »

I don't know anything about this hedge fund manager, but he sounds like a stand-up guy. Or, at least better than me. If I lost $99,800,000 of other people's money, I'd feel so bad, I'd probably drink the last 200k away.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by michaelsieg »

And I thought I was a bad investor....kind of puts my mistakes of the past in perspective
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by dolphinsaremammals »

How are hedge funds regulated, if at all? How do they know he didn't just tuck $100m - $200k into his pocket?
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by gwrvmd »

If you believe in reversion to the mean, bet on this guys next hedge fund........Gordon
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by BigJohn »

z3r0c00l wrote:A very informative filing here: http://www.sec.gov/Archives/edgar/data/ ... ry_doc.xml
Minimum investment $1,000,000..... obviously people that have more money than sense.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by stemikger »

Hedge Funds? NO. Too much hype. Too much diffusion of performance among winners and losers. Too many different strategies. Too many successful managers who won't accept your money. Too much cost and too little tax efficiency. The management fees are so high that they often destroy even the small chance you have of winning. (The hedge fund, it is said, is not an investment strategy but a compensation strategy.) ~ John Bogle (From the Little Book of Common Sense Investing).
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by ccieemeritus »

bpp wrote:We'll have to see if he can duplicate this performance before we can determine whether it is luck or skill.
LOL. You win the Internet for the day.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Tanelorn »

Only 99.8% losses? If he'd been betting against the Swiss Franc he could have had 500% or bigger losses!
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by TT »

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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by staythecourse »

stemikger wrote:Hedge Funds? NO. Too much hype. Too much diffusion of performance among winners and losers. Too many different strategies. Too many successful managers who won't accept your money. Too much cost and too little tax efficiency. The management fees are so high that they often destroy even the small chance you have of winning. (The hedge fund, it is said, is not an investment strategy but a compensation strategy.) ~ John Bogle (From the Little Book of Common Sense Investing).
Can't argue with that!!

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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by technovelist »

Tanelorn wrote:Only 99.8% losses? If he'd been betting against the Swiss Franc he could have had 500% or bigger losses!
Exactly my thoughts.
Of course, that undoubtedly happened to someone else's hedge fund; we just haven't heard about it yet.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Busting Myths »

technovelist wrote:
Tanelorn wrote:Only 99.8% losses? If he'd been betting against the Swiss Franc he could have had 500% or bigger losses!
Exactly my thoughts.
Of course, that undoubtedly happened to someone else's hedge fund; we just haven't heard about it yet.
Everest Capital's $830 million hedge fund is closing after losing almost all its money on the Swiss Franc move.

http://www.reuters.com/article/2015/01/ ... N920150117
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by SteelyEyed »

toto238 wrote:Yeah honestly the manager acted in his own rational self-interest. From his perspective, nothing he did was unreasonable. Immoral? Sure. But not irrational. He followed his self-interest to the letter.

Makes you kinda worried about those that advocate for a society run 100% on nothing but self-interest.
It was definitely in his own short-term interests. Was it in his own long-term interests? The test will be whether or not he keeps/gets another job in the industry. I would hope not, but merit is definitely not the only factor involved.
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by grog »

I can't quite figure out what this guy did. From the article,
Li said in the letter that he made a series of "aggressive transactions" over the last three weeks to make up for poor returns in December. He said he bet on stock price options, predicated on the broader market rising. But stock indexes fell, causing the huge losses along with several undisclosed direct investments, according to the note.
Buying options betting on the broader market to rise sounds like buying call options or maybe selling put options. With the call options, the downside would be limited to the up front cost of the options. Selling puts would have the bigger downside risk from market declines, but the "broader market" didn't really fall much at all (not that I noticed anyway), so he probably used some serious leverage to produce this kind of loss, no?
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by jd88 »

grog wrote:With the call options, the downside would be limited to the up front cost of the options.
He could have bet everything on calls that expired worthless. The "up front cost" is the only cost
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Caduceus »

What I am curious about is if before he winds down, can another hedge fund buy him out to take over all of his tax assets (carryover losses)? Would be awesome to shield $100m, although perhaps a tax-motivated acquisition would be frowned upon?
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by goblue100 »

Tanelorn wrote:Only 99.8% losses? If he'd been betting against the Swiss Franc he could have had 500% or bigger losses!
Exactly. Didn't he understand leverage?
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Re: Hedge fund loses 99.8% of all funds, $100m down to $200k

Post by Abe »

I'm "truly sorry" I lost all y'alls money. :oops:
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