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TheBlueCat

Hedge-Fund Implosions Coming Down The Track

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Oil price volatility, trouble in Russia, China coming off the boil, ECB about to start bond buying.... I think we should expect some hedge fund failures in the not too distant future.

My bet is on firms that have big commodity exposure being the first to go with those with emerging market debt next.

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^Derivatives of Oil bigger than Subprime.

---

Also Saudi Oil will keep oil low until something happens. It is inevitable.

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Getting harder and harder to generate alpha in a 0% yield environment. You need to leverage a billion just to make a dollar.

The mid-sized hedge fund may soon become an endangered species, if one set of predictions for the year ahead prove correct. Hedge funds of all sizes closed their doors in what is expected to be near-record numbers last year, and industry observers believe that will continue — and maybe even accelerate — in 2015.

According to hedge fund marketing and research consultancy Agecroft Partners, in 2015 more hedge funds will shutter than in any other year since the financial crisis. Agecroft pins the closures on four main factors: the hedge fund pool has grown too large, with an estimated 15,000 funds currently operating; a lower quality of returns will trigger redemptions; increased volatility in the markets will increase the divergence of returns between different managers; and small and mid-sized managers will be shunned by investors looking for a big name to look after their money.

http://www.buzzfeed.com/mariahsummers/could-2015-be-the-year-of-mass-hedge-fund-closures#.dsmLwvMJN

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The MAN Group, the world's largest publicly quoted hedge fund is currently on a roll. Their "market momentum" automated programme is delivering bumper profits, investors are flocking back, and their share price has doubled in past year.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11166370/Man-Group-adds-customers-to-its-funds-during-global-market-turmoil.html

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I think we've now reached a point where "everyone knows", hedge funds[1] make a lot more for their managers than for their investors. That means a high churn: you need a convincing new proposition to attract funds, and in most cases you have a limited lifetime before disillusionment. But I guess there's so much QE money sloshing around that many semi-credible propositions get funded.

[1] Using the popular usage, as opposed to the more strictly accurate usage of a fund that reduces risk by sophisticated hedging.

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Central banks warned about leveraged commodity ETFs some time ago.

Haldane on concentration, pro-cyclicality, herding and black swans in the asset management industry generally

http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf

and more specifically ETFs (due to opacity, leverage, illiquidty etc) back in 2011

http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf

My concern would not so much be a hedgie going t1ts on oil/russia etc bets, but an ETF house going t1ts on a commodity ETF fund which spreads into their other funds or has some other knock on impact due to the collateral being called.

Remember most of these commodity ETFs don't invest in commodities at all, they simply buy an 'index' and collaterlise it with US treasuries. Many non-commodity ETFs work in a similar way.

If the ETF market were to suffer a run of some sort that would be mega.

Edited by R K

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AIG backed some of the non-physical ETFs. When the crisis hit AIG - all the ETFs were suspended as I recall. AIG was then backed by the FED, and the ETFs came back to life.

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Central banks warned about leveraged commodity ETFs some time ago.

Haldane on concentration, pro-cyclicality, herding and black swans in the asset management industry generally

http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf

and more specifically ETFs (due to opacity, leverage, illiquidty etc) back in 2011

http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf

My concern would not so much be a hedgie going t1ts on oil/russia etc bets, but an ETF house going t1ts on a commodity ETF fund which spreads into their other funds or has some other knock on impact due to the collateral being called.

Remember most of these commodity ETFs don't invest in commodities at all, they simply buy an 'index' and collaterlise it with US treasuries. Many non-commodity ETFs work in a similar way.

If the ETF market were to suffer a run of some sort that would be mega.

Is it bad to say I want it? :lol: How bad would it be IYO?

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Momentum strategies in general were the big winner last year.

http://www.automated-trading-system.com/state-of-trend-following-in-december-2014/

But many strategies that are mimiced on stockopedia seem to have performed weakly:

http://us4.campaign-archive1.com/?u=bd62eb752b5b6a832968161ea&id=89e5f52521&e=5e05747e02

Surely that's just the difference between trading QE (US) markets and non-QE (UK) markets? Without QE behind their sails the trend followers are exposed as noise traders.

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Well, Citibank wrote the laws to put derivatives back onto the taxpayer recently.

Maybe they're thinking their clients (the hedge funds) are not going to honour their sides of the bets which Citi and others are relying on.

Back to you....taxpayer.

That was in the US. The US taxpayer will take the first thit. Then us.

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Hedge Fund Manager Loses 99.8% In 9 Months, Tells Investors He Is "Sorry" For "Overzealousness"

01/21/2015

Day after day, mainstream media proclaimed December the month to be in stocks: seasonals, Santa Claus rally, and performance-chasing funds would 'guarantee' upside. For Owen Li, former Raj Rajaratnam's Galleon Group trader, and the clients of his Canarsie Capital hedge fund, December 2014 will never be forgotten. According to CNBC, from around $100 million in AUM in March 2014, Li told investors in a letter, the fund had lost all but $200,000 and he was "truly sorry," for "acting overzealously" in the last 3 weeks.

http://www.zerohedge.com/news/2015-01-21/hedge-fund-manager-loses-998-9-months-tells-investors-he-sorry-overzealousness

http://www.cnbc.com/id/102356275

http://www.valuewalk.com/2015/01/hedge-fund-manager-goes-crazy-trading-spree-now-sorry-losing-customer-money/

Ken deRegt, a Morgan Stanley (MS) veteran called on to revamp risk-management and the fixed-income trading business after returning in February 2008, is leaving again to join investment firm Canarsie Capital Group.

DeRegt, 57, will be succeeded by... ...DeRegt will become a partner at Canarsie Capital, which will be a Morgan Stanley client, according to the memo from Gorman and Kelleher. DeRegt’s son works at Canarsie, a firm that was started in January, according to a person familiar with the matter who asked not to be identified because he wasn’t authorized to comment publicly. Attempts to contact Canarsie Capital’s office and employees weren’t successful.

http://www.bloomberg.com/news/2013-05-22/morgan-stanley-names-heaney-rooney-to-lead-fixed-income-unit.html

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Overzealousnes ?! If you flip a coin 100 times, you should be able to know if you have an edge. A spiral of losses can make one take on 50/50 all or nothing bets to recoup the losses. It's time to step away from the computer!

I note the VIX volatility index is edging up to 20..... after being at the 15 level for the last 2 years.

(In 2008 it was past 30)

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Surely this kind of gambling is pretty much zero-sum, since speculating doesn't produce anything of value?

In which case for every profit there has to be a loss somewhere?

Or are the losses meant to be spread very thinly along the little people, so no-one notices them?

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