Hedge Funds Get Rattled As Investors Seek Exits (hedge funds death watch)

WSJ ^ | 09/05/08 | Gregory Zuckerman and Craig Karmin

[TigerLikesRooster]

Hedge Funds Get Rattled As Investors Seek Exits

Friday September 5, 11:44 pm ET

By Gregory Zuckerman and Craig Karmin

With anxiety about hedge-fund woes gripping the market, funds have their own fear: their investors. Some investors, particularly what are known as "funds of funds," are demanding their money back and may ramp up requests in the weeks ahead. That has prompted hedge-fund managers to sell securities to raise cash.

"As the hedge fund investor base broadens, hedge fund portfolio management...slips out of the hands of the portfolio managers and into the hands of the investors," wrote , who runs Whitebox Advisors, a Minneapolis hedge fund with about $5 billion under management, in an August client letter. "It is no insult to the investors to say that this worsens performance."

[TigerLikesRooster]

Ping!

[proxy_user]

There was a rumor reported in today’s Barrons that a number of hedge funds had lost serious money on credit swaps they had used to bet on a big oil hit in Hurricane Gustav.

Does this mean that the investment banks who took the other side made a killing? Maybe some lucky trader made back all he lost on subprime.

[pointsal]

Nothing like bringing a bucket of gasoline to the brush fire......

[dennisw]

Die effin’ hedge funds die! Everyone is sick of you smart Alecs

[ex-Texan]

We can only hope that all Soros funds are on the death watch list . . . When they line up traitors to be shot he ought to be first in line.

[webschooner]

bump for later reading

[freekitty]

Does this mean the Clinton daughter will unemployed?

[infowarrior]

When they line up traitors to be shot he ought to be first in line.

Soros is a traitor to just who, anyways? To my knowledge, he isn't an American, and is even a wanted man (as in wanted for criminal prosecution) here, despite all the dabbling and damage he's doing here. If you had said line up the enemies of humanity to be shot, then I'd agree...

the infowarrior

[org.whodat]

Anyone dumb enough to give their money to a scam like this should lose their money.

[Pan_Yan]

Edward O. Thorp, the mathematician who wrote “Beat the Dealer,” was also a pioneer in hedge funds.

The casinos were worried that his book would be the death of blackjack because so many people could use his system to win. In truth, his book was a boon to casinos because so many people bought his book then went to try it without really understanding it or practicing.

It looks like the same phenomenon can be applied to hedge funds. When there were just a few professionals they generally made very good returns. Thorp made about 20% annually for almost 30 years. As more and more brokers without enough experience (read Hunter Biden) jump in the pool is diluted and the quality diminished.

[jas3]

Edward O. Thorp, the mathematician who wrote “Beat the Dealer,” was also a pioneer in hedge funds.

Thorp was a FASCINATING character. He wrote a book called "Beat the Market" too about how his firm beat indexes by exploiting mispricing in warrants and converts.

The casinos were worried that his book would be the death of blackjack because so many people could use his system to win. In truth, his book was a boon to casinos because so many people bought his book then went to try it without really understanding it or practicing.

Casinos are happy to and happy that others push "systems" on how to beat games because they are actually unbeatable, with the exception of blackjack and poker.

It looks like the same phenomenon can be applied to hedge funds. When there were just a few professionals they generally made very good returns. Thorp made about 20% annually for almost 30 years. As more and more brokers without enough experience (read Hunter Biden) jump in the pool is diluted and the quality diminished.

Hedge fund failure rates have probably been pretty stable over time, but there's no proof b/c startups fail without leaving a trace. "Hedge fund" means only unregistered investment pool and does not imply any hedging at all.

But it is certainly true that returns tend to decline over time as multiple groups exploit the same mispricings and compress margins.

jas3

[muawiyah]

Parando's Paradox is a mathematical proof that shows that you can always win, in the long run, provided you randomly cash in and stash it away for a random length of time.

It can be applied to the markets ~ provided you have a "bank" for your "cash" ~ and there's the problem.

It's not that the supply of talent gets diluted; rather, its that the more players and the more cash being held for the sake of randomness, the more volatility there is in the supply and quality of "banks".

If the hedge fund operators are gambling, and using Parando's Paradox to guide them, they actually have enough money to destabilize "banks".

Lord only knows what happens to the gamblers when all the banks go under. Maybe we are getting an early glimpse.

[GOPJ]

Does this mean that the investment banks who took the other side made a killing?

It's a zero som game - someone's making a killing.

[GOPJ]

Does this mean that the investment banks who took the other side made a killing?

It's a zero sum game - someone's making a killing.

[Pan_Yan]

You both made very good points. The article noted that more and more money was still pouring into these markets. This probably won’t be the last article we’ll see on the subject.

[Pan_Yan]

I just read up on Parrondo’s paradox. It’s an interesting mathmatical theorum that I can see used in certain physics applications (of course, that’s my background) but it looks very risky for financial applications. It seems that an investor’s timing would have to be very fortuitous for it to be profitable. Not to mention the almost unlimited resources you mentioned.

[jas3]

Does this mean that the investment banks who took the other side made a killing.

It's a zero sum game - someone's making a killing.

Not true. Some games are less than zero sum. For example, lending $500,000 on a condo in Miami to someone who can't repay you is less than zero sum. When your borrower defaults, he loses title to the condo, and you lose principal.

When you then try to liquidate your condo in a buyers market and get only $150,000 for it, you lose $350,000.

There are many examples of malinvestment that lead to less than zero sum outcomes for both parties to a transaction.

jas3 jas3

[Gen-X-Dad]

All the kings horses and all the kings men loaded up with fiat money and taxpayers as suckers cannot save the global banking system if the hedge funds domino. The architect of the math underlying the hedge funds said there is $600 trillion on the table and no hope of covering it. These idiots leveraged themselves worse than a desperate gambler on the Sopranos.

Printing money like madmen may stall this from happening but eventually the reality of assets going to zero will topple it. Hyperinflation vs. Deflation, it is going to be a rocky ride for investors.

[Freedom_Is_Not_Free]

Bad example. Still zero sum. You show the two losers but not the winner. The winner is the person who sold a house with $150,000 street value for %500,000. He took the missing $350,000. Still zero sum. Try another example. I think you are on the right track, but this example fails to illustrate it.