Wednesday, September 3, 2008

Closing a Hedge Fund

This is an excerpt of Ospraie Hedge Fund's "blow up" letter. Ospraie recently purchased Con-Agra's trade shop for sereral billion dollars. This is what they had to send to investors this week:

"The losses were primarily caused by a substantial sell-off in a number of energy, mining, and resource equity holdings during a six-week period characterized by some of the sharpest declines in these sectors in the past ten to twenty years. As the Fund's performance deteriorated, we made the decision - despite continued confidence in the Fund's positions - to reduce and de-lever the portfolio significantly due to concern of incurring even greater potential losses..."
(Other excerpts from fund termination letters available here)
Only two thoughts here:  1) If a company is going to outperform the market for 19 out of 20 years...but then not return my capital in the 20th...I think I will pass on investing - since "return OF my capital is more important than return ON my capital."  2)  "Most models are wrong, some are useful." Risk modeling works until something crazy happens.  Sounds like they were overleveraged and putting too much faith in quantitative trading models.   They were caught by a Black Swan.  More on this book (by Nasim Taleb) in a later post. 

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