Bloomberg: Global Alpha Hedge Fund Off 26%
Submitted by
CalculatedRisk on Fri, 08/10/2007 - 12:21pm (54 comments)
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ichiba
Notice the fund manages $8 Billion now - according to Bloomberg - and managed $9 Billion at the end of July. Losing 10% only cost them close to $1 Billion - and I'm sure there will be a few redemption requests coming.
Next week we will have some possible interesting data - I'm especially interested in the retail numbers on Monday and Housing Starts later in the week. We should also get the Senior Loan Officer survey released from the Fed (they already have this info - since it's gathered for the Fed meeting).
Best to all.
"Private hedge fund," "internal hedge fund?" I feel the need for another ubernerd injection. Or is that innoculation?
Ben might need more than one helicopter for Monday.
Technically more like 12% loss in August, since they are down on a lower opening base . . .
Is that $8 billion in investor equity, or $50,000 leveraged into $8 billion in assests?
ac, yeah I was thinking the same thing. Any idea how much this fund is leveraged? Is it basically already dead? AKA Global Alpha to investors: "No soup for you!"
Kind of convenient there is no after hour trade on this today. Wonder what kind of damage control strategy they'll concoct over the weekend. Better be a good one.
CR,
I think the pain from the current crisis won't be really apparent until the home sales numbers in late September, covering August. Those numbers could be dramatically down.
Bob, that was my exact point in a previous thread -
"...the funny thing is that this is all starting even BEFORE any of the nastiness comes out in the housing numbers. Just wait when the reality sinks in that housing has another huge leg down. SO much more ugliness ahead, because the real impact from the lending pullback is just starting and people are STILL in denial."
SEC Probe into Wall St's sub-prime unrecognized losses:
Expired
I agree. People are still in denial. The majority of ARM's are due to reset from this September to April of 2008. Housing prices are still not coming down as they should. Robert Shiller was on CNBC today saying that this corrections is not near the bottom and that it could fall another 25-20 percent. Lets see. I dont know if it will fall that much, but I can see 20%.
I keep seeing this in news articles:
On Friday, as Bernanke faced the first big crisis of his 18-month tenure, the central bank was forced into action, buying up billions of dollars worth of crumbling bonds in an effort to stablize financial markets that appeard to be coming unglued.
Is this accurate? If the Fed is actually buying garbage debt I'm ready to join the hyperinflationist camp.
I thought these bonds were just being used as collateral.
Fed takes action, but was it soon enough? - Eye on the Economy- msnbc.com
If the SEC finds that banks are hiding losses, then I say open the flood gates. I think most banks would be hiding some amount. To what extent, I have no idea.
I meant ot say 25-30% above.
Brian23, I think many people who financed/refinanced houses in the last few years are clinging to the notion that the house is worth the total outstanding debt.
The whole market is 'hiding' losses by refusing to trade the junk they know they have, at market prices. As long as the stuff is illquid they don't have to wrte down their assets and expose ther true losses.
Any Asset is worth the NPV of cash flows. Lots of Fixed Assets are valued otherwise, but financial instruments held, that's your benchmark. There are more specifics depending upon how long you intend to keep the asset, but NPV is essentially it, and I'd expect the SEC to be pretty skepical about rosy projections at this point.
A hedge fund that loses 26% will almost surely be liquidated. It isn't worth it to keep it open, because the big money is made in incentive allocation fees. The fund's General Partner can't earn these fees until the fund recovers at least 26% to get back to its "high water mark," simply put. So, they will probably take most assets to cash fairly quickly and then seek an orderly unwind. Those investors who want to transfer into another GS hedge fund will be warmly welcomed.
The point is -- it doesn't take a huge meltdown in hedge funds to generate large position liquidations. Even 10% can be enough. It's the fund-driven liquidations, not investor-driven, that usually are largest.
Bob_in_MA Re:
"I think the pain from the current crisis won't be really apparent until the home sales numbers in late September, "
I think the fun will begin on August 15 when there could be a lot of Redemption Requests given to the Hedge Funds. If the requests are large in number or amount, the Funds have one of two distasteful options: Refuse the requests because they cannot liquidate the investments (eg CLO's CDO's or MBS's) OR Sell the Collateral(if there is leverage) or
Sell the investments if there is no leverage.--In either event, wear your helmet.
But that's not all Folks--the Fun continues on August 31st when the Investment Banks have to report on the "value" of their Loans and Investments. The Pier Loans, the MBS, the subprime loans forclosed on in the warehouse. "I know let's use Mark-to-Model--its worked before" -- Keep your helmet on
--Then-- we can all enjoy the "home sales numbers" --when the vacation season is over.
I have never seen so much BS (and billions) thrown about in order to buy some time as I have in the last couple days. What we just witnessed was a plume of smoke on Mt. Saint Helens.
On Friday, as Bernanke faced the first big crisis of his 18-month tenure, the central bank was forced into action, buying up billions of dollars worth of crumbling bonds in an effort to stablize financial markets that appeard to be coming unglued.
Is this accurate? If the Fed is actually buying garbage debt I'm ready to join the hyperinflationist camp.
Not as far as I know. As far as I know, the Fed action involved repos. Technically, yes, that means the Fed purchased MBS from banks. It has an agreement with them that they will buy those MBS back in 14 days. In the 14 days the banks get the cash in their reserve accounts and the Fed gets the cash flow from the MBS.
"Crumbling bonds" is cute. These aren't wacky subprime strips, they're GSE and Ginnie Mae MBS. Certainly, there's a price problem with high-quality MBS like that right now, but that's why this is a "crisis."
Jeebus. They go for months and months on this "it's just subprime" thing, then all of a sudden they decide that all MBS are toxic waste. Yes, reporters, that would be an "overreaction." We're in an "overreaction." The Fed is attempting to keep the banks liquid during this "overreaction." Thanks so much for helping out by reporting it straight . . . at least you can't accuse MSNBC of being a tool of the Fed.
Yes, but, who can we accuse?
I'd love to Hear a report on GM'a Pension fund... last i checked it was being managed by some GS alphanerds
Tanta, According to the Fed, these were just 3 day repos
- not even 14 day. So this isn't a big deal at all.
Bob_in_MA, Geoff, I agree - when the housing numbers come out for August - sometime in September and October - that will really scare people.
Best to all.
Foreclosures Complicate Resale Market
Rock meets hard place, as banks try to figure out how best to dispose of their pile of foreclosed homes in an environment of tighter mortgage credit.
Foreclosures Complicate Resale Market - Economic Conditions, Mortgages And Banking, Distressed Assets, Loans, Lenders, Home Prices, Real Estate Brokers - Builder Magazine
Oh for heaven's sake. Weekend repos? That's what we're all worked up about?
Back when I was working for a bank we usually tried to create financial armegeddon for at least 14 days or overnight. We didn't do long weekends. My bad.
Well, at least pre-season football kicksoff this weekend. That should provide some welcome distraction.
WaMu basically came out and said earlier that they were in trouble. There was an article on Forbes that actually had a direct quote from the bank saying they were having a liquidity problem. The same link now leads to this article:
Mortgage Worries Hit Washington Mutual - Forbes.com
Notice the "*An earlier published version of this article mischaracterized the effects of the secondary mortgage market on Washington Mutual's liquidity." at the bottom.
Yet the earlier article had a quote from someone at the bank saying so.
How long can this cover up last?
itsallgreektome, you mean wamu is having a tough time tapping into all that neg-am interest profits they've been booking? Surprise, surprise.
Tanta - I'm trying to think thru your post on the Repos. I don't think the Fed gets the cash flow on the MBS. If they did, they'd be getting the interest on the loans to the dealers and the interest on the MBS as well as any prinicipal paydowns. They'd essentially be getting paid double, right?
The Big Picture
Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees
Friday, August 10, 2007 | 03:30 PM
in Credit | Derivatives | Psychology/Sentiment
This bit of humor has been circulating around Wall Street the past few days:
Investment Dealers are excited to announce the newest structured finance product - Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees, or COLOSTOMY BAGS. Designed to accommodate the most sophisticated investment strategies, Colostomy Bags contain the equity tranches of Structured High Interest Taxable Derivatives, or SHIT, and are leveraged an infinite amount of times through the innovative use of derivatives.
"Its an actively managed, unlimited liability, open ended investment with no maturity date, which pays LIBOR plus 5,000 and has no correlation to traditional investments" said a spokesman for the Investment Dealer who engineered the product. "It's based on a CDO structure, but it's designed to default BEFORE the first coupon payment, which you'll agree has no correlation with stodgy traditional investments and is a perfect fit for portable alpha scams, er, strategies." Following the default, each month more leverage is added to the structure to pay for the coupon and the Dealer's fees which are set at 80%. "We feel the fees are reasonable, given the adrenaline rush you'll get each month attempting to mark these."
I'm not very smart. Can someone help me understand whether all this is inflationary or deflationary?
gab, thank you, I was apparently under the influence there. I'm curious about what I had in mind. I was just reading something else on securities and I have "cash flow" on the brain.
In any case, the Fed gets the repo rate, and the cash flow from the MBS remains with the bank, even though ownership of the security actually passes to the Fed during the term of the repo agreement.
Tanta - I'm trying to think thru your post on the Repos. I don't think the Fed gets the cash flow on the MBS. If they did, they'd be getting the interest on the loans to the dealers and the interest on the MBS as well as any prinicipal paydowns. They'd essentially be getting paid double, right?
gab | 08.10.07 - 5:35 pm | #
ROF
No ones getting the cash flow on that stuff....that's the point!
I am hearing many loan brokers are going after the Fed repo re-fi biz:
Lots of money in it and the teaser rate runs out after 3 days
"...Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees, or COLOSTOMY BAGS..."
That's one bag you don't want to get left holding...
-- Hiding out
No ones getting the cash flow on that stuff....that's the point!
There have been bonds defaulting that I haven't heard about?
The biggest bank in "Second life" has just colapsed.
No not a real bank but it had real deposits and offered 44% intrest rate.
Gab,
Here is how a repurchase agreement works as I understand it. The fed "buys" the security at an agreed upon price (lets say 100% of Par--the loan amount)--There is a simultaneous second agreement where the other party (the borrower) agrees to "repurchase" the security at The Price(100% of par) plus an interest rate--on a date certain. In our case in 3days.
Since the Fed is getting the repurchase interest rate--the other party (the borrower) is entitled to the dividends on the security. This is generally the case, as a commercial matter in my expierence. If the borrower defaults, however,in that is fails to repurchase, then the Fed would take the security and the dividends on the security.
The whole structure operates like a secured loan, except in the bankrupcy court where Repos are given a slightly different treatment.
Cheers
No ones getting the cash flow on that stuff....that's the point!
There have been bonds defaulting that I haven't heard about?
Tanta | 08.10.07 - 5:58 pm | #
Oh SH*T, A direct response from the teacher... I'm outa here !
Investment Opportunity:
I will lose you 26% over 8 months for ONLY 1 & 10.
(Please present this coupon to your server before ordering)
LC:Hey , those bonds are'nt paying...
SC: Yeah they are
LC: what are you talkin about, there 90 days late
SC: no ,no,no, there not, the check's are in the mail
LC:well that's a technical default
SC: How can It be, i've been assureed that the checks were written..
LC: but our contract states that
SC: what contract
LC:now what are you talking about
SC: hello, is anybody there..Hello
LC:hey , can you hear me
SC: hmmm, no one there, hey it's friday... drinks are on me....or , really the LC guys ...wuuuu huuuuu
Anyone else note that ,at the bottom of the comments window, are offers for Ann Coulter's column and Newt Gingrich's newsletter?
Have we discovered the true identities of Tanta and CR? Somehow I doubt it - I would guess Tanta is the anti-Coulter.
There is irony here somewhere though.
Down 40% over 12 months? Dead. DOA. Stick a fork in'em.
OT, but can someone please explain to me how AFBIX, a fund that tracks the inverse of the high yield debt market has only gained 1.35% since July 7 when I invested in it?
I thought the high yield market has been tanking in recent weeks. Am I missing something here?
tbar-deflationary
Lawfitz,
I haven't checked numbers, but I don't think the junk market has tanked, as in prices for bonds going down each day. Instead the market has simply stopped functioning. I suspect positions aren't being marked down much because there is literally no price right now, so 93 is as good a guess as 89 is as good as 86.5. So let's keep it at 93.
My guess anyway, it is what happened in 1998.
Banker, good call.
Dam mark to model is killing me on a personal level now, I guess.
Step it up SEC!!!
LawFitz,
I think the genuine problem, even if the SEC came in is, on what basis should positions be marked down? I mean when there is literally no bid, what do you do? It's easier to say lower, but where 85? 81? 63?
I don't know what the answer should be or what we'd be asking the SEC to do. I do think that today's levels are likely a fiction, but I think I'd probably say that about ANY levels.
Seems like there's got to be some reasonable range based on yields of comparably ranked bonds.
There has to be some sales of
Well, at least pre-season football kicksoff this weekend. That should provide some welcome distraction.
You're right, kicking the shit out of some pig is just the metaphor we need to soothe the masses.
Sorry, that's not a metaphor. Pigs are pigs are pigs.
I think the genuine problem, even if the SEC came in is, on what basis should positions be marked down? I mean when there is literally no bid, what do you do? It's easier to say lower, but where 85? 81? 63?
Well, typically, if I have something that absolutely no one is willing to buy then I figure that it's worthless...
Lawfitz - the fund is a little funky, and I'm not surprised it's been dull. If you look at the prospectus (which I have to confess I didn't do until after investing, which I'm not proud of), the fund consists of five-year CDX in, I believe, the 7 series. So far so good, but they also hold five-year Treasuries against those contracts. I was surprised to see that, as I presumed the portfolio would have held cash rather than Treasuries, though I suppose there's a case for that from a duration perspective.
At any rate, in performance terms, this structure means you're exposed not only to the movements in spreads (NOT overall HY performance) but ALSO to the volatile performance of the 5-year TSY. The two can and often do offset each other, which seems to be what has hurt the fund recently. I sold out a while back for that reason.