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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: regli who wrote (54562)8/10/2006 9:02:12 AM
From: YanivBA  Read Replies (3) of 116555
 
News and comment: Hedge Fund Bust Could Threaten ABN Amro's Futures Sale

August 9, 2006 11:26 p.m. EST

Josephine Roque - All Headline News Staff Writer

(AHN) - Dutch banking giant ABN Amro will have to deal with a $100 million loss from heavily lending to a hedge fund, led by former New York Mercantile Exchange President Robert "Bo" Collins. It could jeopardize the terms of its ongoing $386 million deal with Swiss investment bank UBS.
...
Motherrock was the hedge fund managed by Collins. It went bust last week as it gambled investors' money amounting to $450 million on natural gas gone awry
...
Motherrock's downfall came when unexpected levels of natural gas were taken out during the heat wave, which sent prices zooming.

allheadlinenews.com

This is so typical. Hedge funds are built to produce high and steady income in normal market conditions. Such a position is rewarded with a return if and only if the position holder is willing to suffer extraordinary losses in the event conditions stray from normal.

This is a game of heads - I win. I provide you the investor with high returns and low volatility, I take 20% – tails - I go bankrupt, you the investor find that nobody answers the phones anymore and since I was trading on margin my bank is looking at a big black hole where once there was a juicy client.

You would think that banks would know better than that. If I, Yaniv, would ask any of the forum participants to provide me with a steady income, say 1000$ a month, in return for my obligation to pay you back one Trilion dollars in case it rains frogs in Greenwich none would take the bet not because it is such a bad bet, but because I clearly don't have the money to cover by obligation.

Now, this is exactly the sorts of bet that hedge funds make. They scan the historical records to find a system in the chaos and surely enough they find one. The problem is it is just history, even if it never rained frogs in Greenwich it does not mean that it never will. Or that it would never get that hot. What the hedge fund manager knows is that his loss is limited.

But the bank manages the positions of many hedge funds. Something unexpected always happens and the bank always gets stuck with the bill. This is like the bank is the nerd kid on the block which everybody uses. How long can this carry on? Will it take to have a major bank go under to make it stop?

YanivBA.
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