[Infowarrior] - OT: How To Speak Hedgie

[Richard Forno]

How To Speak Hedgie

What hedge-fund managers mean when they talk about challenges.
By Daniel Gross
Posted Tuesday, Aug. 14, 2007, at 4:16 PM ET

http://www.slate.com/id/2172224/nav/tap3/

In these days of market volatility, hedge-fund managers and executives at
all types of money management firms have been forced to explain why their
funds are shutting down, losing money hand over fist, and freezing
investors' funds. When they do so, however, they frequently lapse into a
strange euphemistic dialect. And so we thought it would be helpful to
provide a handy Hedgie-English glossary.

Hedge-Fund Phrase: Challenging
Translation: Run for the hills!

Hedge-fund managers never piss away money. They just face challenges. "We
sincerely appreciate your patience and understanding during this challenging
period," Jeffrey Larson, founder of Sowood Capital, told investors last
month, as he explained why the $3 billion hedge fund, having lost half its
capital, was selling off its remaining positions and closing up shop. As two
of its large hedge funds that invested in mortgage-backed securities were
going down, Bear Stearns CEO James Cayne told investors that "the sub-prime
mortgage market has been challenging for a number of months." More recently,
Monday's Wall Street Journal quoted giant asset manager Barclays as saying
that performance in its 32 Capital Fund had been "challenging."

Hedge-Fund Phrase: Unprecedented, unique circumstances
Translation: Stuff happens. But we had no clue.

Anyone who read the best seller The Black Swan knows that random
geopolitical, financial, and economic events can cause the prices of assets
to move in ways that defy history and sophisticated computer models. But it
comes as a shock to the brightest minds on Wall Street, especially those who
run quantitative-based funds. "Wednesday is the type of day people will
remember in quant-land for a very long time," Matthew Rothman, head of
quantitative equity strategies for Lehman Brothers told the Wall Street
Journal last week. "Events that models only predicted would happen once in
10,000 years happened every day for three days." Strangely, these same
models failed to predict the once-in-10,000-year events that roiled the
markets in 1997, 1998, 2001, and 2002.

Hedge-Fund Phrase: Market volatility has produced unfair, unrealistic
prices.
Translation: The market is efficient only when it works in our favor.

Several money managers blamed their temporary problems on investors'
irrational collective behavior. "Investor fear has overtaken reason and has
induced a period in which most securities have simply ceased to trade," said
Sentinel Management, which sought to halt redemptions of some of its funds
this week. And such conditions make it "virtually impossible to properly
price securities or to trade them." Goldman Sachs CFO David Viniar noted
that the firm's decision to inject $2 billion into its ailing Global Equity
Opportunities fund "reflects our collective belief that the value of this
fund is suffering from a market dislocation that does not reflect the
fundamental value of the fund's positions." In other words, the losses shown
by these funds isn't the fault of the managers, it's the fault of a market
that just won't value assets properly. Ironically, you never hear fund
managers say that their gains have been unwarrantedly large due to the
market's failure to reflect stocks' fundamental value.

Hedge-Fund Phrase: Our results were affected by the selling behavior of
other firms.
Translation: We made the same dumb trades as everyone else.

"We have been caught in what appears to be a large wave of de-leveraging on
the part of quantitative long/short hedge funds,'' James Simons of
Renaissance Technologies said in a letter to investors last week, which
sought to explain losses in his highly regarded hedge fund. He also noted
that the methodology used by his fund was "undoubtedly shared by a number of
long/short hedge funds." Goldman Sachs similarly blamed other funds'
behavior for its own losses. Of course, the premise of high-end money
management is that you don't simply mimic the same investment strategy of 30
other hedge funds. That why Simons was paid $1.7 billion in 2006 (article
purchase required).

Hedge-Fund Phrase: We just want to protect investors.
Translation: We just want to cover our butts.

Declining performance frequently leads investors to withdraw their funds,
which can, in turn, force hedge funds to sell securities to raise cash. To
forestall the ensuing death spiral, funds sometimes lock the door. French
bank BNP Paribas last week froze redemptions of three funds that held
mortgage-backed securities. BNP said it was limiting the liberté of its
investors for the sake of protecting the Gallic virtues of égalité and
fraternité. Locking up the funds temporarily is the best way "to protect the
interests and ensure the equal treatment of our investors." Sentinel used
the classic American trope of aligning the interests of the owners with
those of the shareholders. "We don't believe it is in anyone's best interest
if a run on Sentinel took place and we were in a forced liquidation mode."

Hedge-Fund Phrase: This isn't a rescue.
Translation: THIS IS TOTALLY A RESCUE!!!!!!!

Goldman Sachs' GEO fund lost 30 percent of its value in a week and was
leveraged at a rate of 6-to-1. But to hear Goldman tell it, the cratering of
its own fund simply presented an irresistible buying opportunity. "We are
investing not because we have to, but because we want to," said Viniar
during a conference call. At another point, he noted: "No, let me just
clarify. This is not a rescue." And if you believe that, I've got some
subprime debt I'd like to sell you.