Wednesday, September 03, 2008

Hunting Season

Ouch. Macro Man evidently forgot to mention one more milestone beginning in yesterday's post. September 1 marked the beginning of hunting season in the UK for various avian species, including patridge, duck, goose, wood cock and plover.

On the basis of today's evidence, we can add three more species that are getting shot down, some in spectacular fashion:

1) Ospraie (sic). For the past few years, this commodity fund has been known for all the right reasons: it's been in a hot market and delivered great performance. This morning, it's in the headlines for the wrong reasons: after dropping more than 25% last month (and 38% from its peak), Ospraie's flagship fund is shuttering its doors.

Macro Man has two observations. Ospraie has said that they hope to return 40% of its assets to investors by the end of the month, another 40% by the end of the year, and the remaining 20% within three years. Clearly, the fund's holdings haven't exactly been uber-liquid. And if there's one lesson that we all should have learned over the past year, it's that there is real value in market liquidity.

Meanwhile, this is yet another example of the maxim that when it rains, it pours. Holder of 20% of the Ospraie management company (which is worth a tad less today than it was a few days ago) is.......Lehman Brothers! Lehman, incidentally, reports Q3 earnings in a couple of weeks. The anticipation of bad news is one of the reasons that Macro Man has started to scale back into equity shorts; he started buying FTSE downside yesterday.

2) Kiwi. The flightless bird has landed with a thud, shedding 6.5% against the USD over the past couple of weeks. The NZD has been Macro Man's own personal hell over the past month; he's been bearish, has been short, and yet contrived not to make any money because of some of the option structures that he's put in place (and the bad spot trades he's done against those structures.)

This provides an object lesson in the importance of security/strategy selection, and that this game isn't just about getting the macro view view right. Usually, calling the market the right way is enough to ensure some degree of profitability, with the choice of strategy simply dictating different shades of profit or loss. Occasionally, however, choosing the wrong strategy can completely eradicate the benefit of calling the market correctly. Sadly, NZD has been a case in point for Macro Man (though at least his short gamma nightmare is now over.)

3) Pink flamingos. It looks like the pink flamingos of consensus positioning (which Macro Man wrote about a few months ago) are coming under fire once again. Exhibit A is the rouble basket trade, which has gone badly wrong again this morning after squeezing during Macro Man's August holiday. It's a pretty consensus trade with a high-conviction buy-in; 30.10 has been seen as something of a no-fly zone that will spur further short-covering in the event of a close near current levels.
While Macro Man suffered on this one last month, he at least had the sense to get out when he could and sleep easy. In this kind of market, if someone says that they aim to screw you'd have to think that they have a decent chance of succeeding.

On a lighter note, Macro Man observed with interest that the Korean Military Fund is considering joining KDB in taking a stake in Lehman. Should they prove successful, Macro Man can envisage how the culture of "The Bruddahs" might change.

He can just imagine the scenes outside of Lehman's Canary Wharf offices when the trading desks file into work under the new Korean ownership; it'll probably look so0mething like the image above. The good news is that Lehman would likely fare better in times of distress; observe how they're all kitted out with the appropriate hardware to go hunting!


Anonymous said...

Ospraie Management=Dwight Anderson? See Drobny's "The House of Money" from Wiley.


Macro Man said...

AT, indeed. A surprisingly large percentage of the guys in that book have really scuffled since its publication a couple of years ago.

Anonymous said...

I have watched Ospraie's fall to earth without surprise. RIP Ospraie 1999-2008. The US press this AM also has Lehman about to move onto the mortuary slab, predicting, after the sale of the asset mgmt business, that the co will be divided into the "bad Lehman" --a holding tank for troubled assets-- and the remaining business-- a tiny boutique. If so, RIP Lehman 1850-2008. Both Ospraie and LEH fell prey to the belief that trees would grow to the sky . These days, I often think of the words of John Stumpf, cited by Buffett--"It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine."

ajay said...

Wrong Koreans - those guys are KPA, not ROK...

Macro Man said...

I know, I know, but the South Korean military has the annoying habit of not engaging in frog-marching parades that fit the joke I was looking for.

Anonymous said...

C'mon MM, confess YOU are the anonymous currency trader whose interview is reported in the last chapter of the book! Words like "gestalt shift" sound so "macromanish"...

By the way, the events of the very first days of August quite resemble a "gestalt shift" in the currency world, don't you think?


Macro Man said...

AT, I am not him, but I know him.

And yes, there does seem to have been something of a gestalt shift, though alas I am spinning my wheels.

Anonymous said...

Gee, this planet is getting smaller and smaller...

Anyway, "anonymous" seems to be a smart guy - his thoughts on currency markets and short gamma positions have been illuminating to me, forcing me to reconsider my plans to become an option writer. Did you work with him?


Anonymous said...

Great Hunting season theme. Re the pink flamingoes, I am familiar with the Russian reversals on the equity investment side where the story is similar. With general consistency, the government will invite in capital as part of the great westernization then take over the investment. Despite this track record by the Russians, willing equity partners still can be found, so the strategy seems to pay off. The lure of profits often leads to short memories or a willingness to trust that this time will be different.

Macro Man said...

Anyone who's familiar with the Bob Browder story and has put money in RTS index over the last year or so probably deserves the returns that they've received.

Anonymous said...

"Anyone who's familiar with the Bob Browder story and has put money in RTS index over the last year or so probably deserves the returns that they've received."

Do you mean BILL Browder (Hermitage Capital Management)?

I have heard that for the right price ($100,000 to $150,000) a person can get anyone else banned from entering Russia (unable to obtain a visa). Think a few Russian companies might have wanted that?

Rule number one for investing in Russia - never bet against the government.

Rule number two - never bet against anyone with more money than you have.

tastexperience said...

A surprisingly large percentage of the guys in that book have really scuffled

Who else has hit the skids?

I'm really not surprised that Anderson blew up. In the Drobny interview he talks about shorting tech stocks in mid-1999, which suggests an extreme lack of risk control. And then there was 2006...

AT, I am not him, but I know him.

His piece was hilarious. Is he as outlandish in real life as in the book?

Macro Man said...

Err, yes....Bill Browder.

As for the ITHOM curse...

- The currency chap (who is a larger than life character) has seen a big loss of AUM

- Semper's not done terribly well the last few years

- LDF have dropped 20% or so this year

- Wadhwani has shut down

I may be missing someone, but still- add in Ospraie and it's a pretty bad run for the stable of mangers.

Anonymous said...

Have watched Browder ( now in London) and Hermitage for years, being grateful, as MM said, that my money was elsewhere. Interesting that MM's post struck so many nerves today. The risk premium on some of these markets now places them out of the game. I try to approach markets as a hunter, but these days am more apt to feel akin to the hunted member of the species MM mentions that are in season.

Corey said...

Not that I'm one to make "calls" on this board ;) ... but it would seem the USD is about ready to start heading back down to the lower part of the channel or "range" macro-man talked about a week or so ago. My yen position has been outperforming, and my theory was the yen would start outperforming when the equity markets were about to roll over and head to new lows. I'm long RUT puts for sept/oct as I believe the RUT will mean revert to valuations around 0.5x the S&P, which at current index levels portends at least 635 RUT vs. S&P 1270. During economic downturns, the RUT tends to overshoot to the downside under 0.5x the S&P, and I don't see why it won't this time.

Anonymous said...

I am not a market profi at all. So, apologies if what i suggest sounds stupid. I understand that emerging markets offer great rewards (as the florida EM guy from "the House of Money" kept repeating) but it comes at a cost of higher vol and liquidity risk people forget to mention. Add to it irratic Russians always lurking behind to do you. Why not just then enjoy the relative serenity of G7 markets. Leverage it two times which should give you more or less the same returns and vol w/out liquidity risk

Anonymous said...

What i do not understand w fund managers is this: they ride the trend but literally do not know when to step off. I would be interested to know: how many people reading this blog were expecting or not expecting a correction in commodities back in April - June given such a huge rise up to 2008 and global weakness? I must admit I would think I am stupid compared to Dwight from Ospraie but find it incredible that people try to ride commodities in the face of it all!!! That reminds me of Soros as well: his India bet was not so profitable this year i read. Or he just became very conservative and like his ex partner Jim Rogers wants to hold it for a veryyy long term

tastexperience said...

how many people reading this blog were expecting or not expecting a correction in commodities back in April - June given such a huge rise up to 2008 and global weakness?

I've been bearish on commodities for nearly a year and began shorting copper/steelmakers/foreign currencies in April and May.

It produced losses for the first month but then worked even better than I'd expected. I covered most of these bets yesterday, but think they have farther to go in the long term - particularly copper, which trades at something like 250-275% of marginal cost.

TG said...

Speaking of getting it right and losing money, sterling this week, hell, sterling this year, has been brutal.

February: Go simple, pay the theta, wait for the move? Sorry, no recoupling just yet, pal.

July: Get a bit cute, think, "Maybe this is just a grind-y trade, the gamma value's certainly not there" and have Swervyn and the Chancellor give you the fastest, largest drop in cable since Black Wednesday.

I need a beer.

Macro Man said...

Anon @ 17.10, speaking for no one but myself, all I can say is that I have done very well out of EM this year- from both the long and short side- but in aggregate haven't made a penny in G10 currency and bond markets. Maybe it's because the mispricings are greater, the correlations more serial, or the fundamentals more pronounced...but for me the first seven months of this year were ripe with opportunity for EM.

TG, everything you need to know about GBP is this:

for the first six months of the year, the monthly New York close was on a 1.98 handle. The seventh month closed above (on a 1.99 handle if memory serves.)

The eighth month was the largest £ decline in sixteen years.


Anonymous said...

Interesting listening to Michael Lewis from Deutsche Bank on Bloomie today? Cable 1.40...Hmmm

Anonymous said...

"how many people reading this blog were expecting or not expecting a correction in commodities back in April - June given such a huge rise up to 2008 and global weakness?"

Speaking for myself, I threw away an unbelieveable amount of (potential) profits not buying commodities on the way up. My system kept saying "buy," but I just couldn't pull the trigger (especially on oil and the ags). The prices just didn't make any sense to me.

But when they started to roll over, I was ready. I have made absolutely fantastic money in the last couple of months shorting commodities (four dollars in four weeks on natural gas, for example). I have no idea how much further they will drop, but I can't see much strength from here with the combination of slowing economies worldwide and deleveraging.

ApDewi said...

Anon, Lewis of Deutsche said 1.40 for dollar vs.......EUR. A slightly less ambitious call.

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