Hedge-Fund Guy Atones for His Subprime Bond Sins:
Mark Gilbert2007-08-15 19:34 (New York)Commentary by Mark Gilbert Aug. 16 (Bloomberg) --
Dear investor,
we'd like to take thisopportunity to update you on the recent performance of our hedge fund,Short-Term Capital Mismanagement LLP. As you know, market selection for the entire fund is guided by aproprietary investing tool we like to call ``a dartboard.''Once the asset classes are decided, individual security selections aregenerated by digitizing our unique hexagonal cuboid models. Unfortunately, it transpires that our hexagonal cuboids are not asunique as we thought. Hundreds of other hedge funds possess identicaldice. The technical term for this is a ``crowded trade.'' You may alsosee it referred to as ``climbing on a bandwagon already headed for thewall.'' As our alpha generation collapses, our beta has turned negative,our delta hedging has gone toxic and, trust me, you do not want to hearabout our gamma. We can't even find our epsilons in the dark with bothhands. You will appreciate that accurate pricing is essential forevaluating our investment strategies. This has proven to be extremelychallenging in recent days. Previously, we have relied on Bob, the salesguy at Hokey-Cokey Bank. Bob assured us the securities were still worth100 percent of face value, so everything was cool. Bob sold thecollateralized debt obligations to us in the first place, so he knowswhat he's talking about. Bob, however, appears to have had a nervous breakdown, judging bythe maniacal laughter that greeted our requests for price verificationthis week. Our efforts to implement an in- house CDO valuationframework, using a technique the ancients knew as ``making things up,''proved unsatisfactory.
Where's the Bid?
Currently, all of the portfolios we manage are undergoing arigorous screening known as ``crossing our fingers and praying that wedon't have to try and find a bid in the market.'' This is supplementedby a cross-market statistical analysis originally developed by the U.S.military called ``don't ask, don't tell.''This ``unmarking-to-unmarket'' procedure has been the benchmark for thehedge-fund industry for the past, ooh, 72 hours. We have, of course, been in touch with the rating companies toupdate our default-probability scenarios, particularly on the AAA ratedinvestments we own. They recommended a forecasting method usingstochastics to regress the drift-to-downgrade timescales for the past100 years and throw them forward for the next five minutes. Thetechnical term for this is ``induction,''though those of you of a less quantitative bent may know it as``guessing.''
AAA or Toast?
We are pleased to report that, contrary to what current marketprices might suggest, all of our top-rated securities remain absolutelyAAA. Provided, that is, the future performance of the underlyingcollateral is identical to its history.Otherwise, the rating companies say our investments are likely to bereclassified as ``toast.'' We have also been checking our back-up credit lines with ourfriends in the investment-banking world. As soon as they return ourcalls, we'll be able to update you on our emergency liquidity position.We are sure they are fine. Some of you have written to us asking for your money back, citingclauses in the fund documentation called redemption rights. Frankly, wenever expected you to actually read that prospectus, which cameprepackaged when we bought the Microsoft Hedge-Fund Guy software. Wecertainly have no idea what all those long words mean. We have filed your letters in a special drawer in the filingcabinet marked ``trash'' for now. Do you have any idea how much troubleyou all would be in if we actually sold this stuff in the market today?At these crazy prices? Fuhgeddaboudit. You'll thank us later.
Not a Rescue
Speaking of crazy prices, we know you'll be thrilled to learn thatwe've invited a bunch of our rich pals into the fund to participate inthis once-in-a-lifetime opportunity. But this is not a rescue. Do noteven think the word rescue. This is an opportunity. Not a rescue. Anopportunity. In fact, we think this is such a fantastic opportunity, we'veagreed to forgo our usual management fee, and we'll only take half ourusual slice of the profits. Provided there are any profits to slice.You, of course, are absolutely invited to participate in this offer bysending us yet more of your money on exactly the same revised terms asour rich pals. Finally, a word for all of you who have been kind enough to inquireabout my personal financial situation. I am relieved to report that mydirectors and officers insurance is fully paid up.Furthermore, my Bentley Continental was paid out of the 2 percent fee welevied when you wrote your first check to us, so I will still be able totrundle into the parking lot each morning in an open-necked shirt toignore your telephone calls and e-mails.
Yours, Hedge-Fund Guy.
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