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[caja-dglh]

Past performance is a guide of future results as Meriwether works on losing a fortune again.

Probably a nil thread, but the title inspired me to post anyway.

[ursus arctos]

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It's actually quite amazing how these guys continue to convince people to give them hundreds of millions of dollars to play with.

Looking at the graph, he has had one good year this decade, and I can't tell if those results have been adjusted to reflect the carry and fees.

[Ginger Yellow]

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The entire hedge fund industry is based on a series of fallacies. To the extent that any manager really adds alpha, it's all eaten away by the enormous fees. And the vast majority of funds do not add any alpha, if you look at their performance. And the incentives are usually misaligned.

Martin Wolf in the FT has had some good columns on the subject recently.

[Anton Gramscescu]

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Obviously, I'm no expert, but how the hell do you lose 30% on a bond fund when interest rates are going down?

[Ginger Yellow]

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Very easily, in these markets. Leverage is the usual reason. Relatively small price declines will wipe out your equity. The Carlyle fund which blew up a few weeks back was invested entirely in US agency securities, which are considered quasi-governmental risk. Didn't help them much.

"His bond fund had $14.90 in borrowed money for every $1 in equity at the end of February, according to the March 18 letter. "

[Anton Gramscescu]

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Um. Yeah, but don't bond prices tend to go up as interest falls? I understand what leverage does, but doesn't that suggest that these guys were betting big the other way? The last time anyone seriously thought rates were going up was about June: they've had nine months to unload these positions...

[Guest]

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I'm the only who does nil threads round here. 2 already! that's quite some going I reckon.

[Ginger Yellow]

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"Um. Yeah, but don't bond prices tend to go up as interest falls?"

In normal market conditions, yes. Bond yields reflect both interest rate expectations and perceived credit and liquidity risk. In case you hadn't noticed, the credit markets have been in freefall for the last 9 months. Treasury yields have fallen so far that the US has negative real interest rates, but everything else has ballooned. You can quite easily get 200bp spreads on some triple-A bonds. Given that the same bonds were trading in the low teens 9 months ago, that's quite a price drop. If you multiply that by 15 times leverage, you're screwed. Now Merriwether wouldn't have been in those bonds, given the numbers we're talking about, but even a fairly conservative, non-Treasury portfolio would have taken a hefty hit.