Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Perspective who wrote (84942)	8/13/2007 9:49:42 AM
From: MulhollandDrive	Read Replies (1) \| Respond to of 306849

when everyone tries to make money betting against the same unlikely event, they are ensuring that it will in fact occur very soon. black box is morphing into black swan?

To: Perspective who wrote (84942)	8/13/2007 9:49:53 AM
From: 10K a day	Read Replies (1) \| Respond to of 306849

So what is a 5 or 8 billion dollar fund to do when they lose 26 percent in a short time? Stay in those same (LOSING) positions? Do you throw good money after bad? Geeze. I don't think they taught those brilliant MIT PHD's about damage control when their models [and funds] blow up. I don't think that was in the prospectus!

To: Perspective who wrote (84942)	8/13/2007 12:59:29 PM
From: ChanceIs	Read Replies (1) \| Respond to of 306849

With Many Holding Same Hands, Quant Funds Find Exiting Costly August 13, 2007 Investors in quant funds are used to occasional bouts of poor performance. The quantitative-trading systems almost inevitably get caught out when market fashions change. But the scale of recent losses -- Goldman Sachs Group's Global Alpha fund is reported down 16% this year, Renaissance Equity Investment Fund is believed to be down 9% in August and Man Group's AHL is down 7% in two weeks -- confirms this is no ordinary drawdown. The funds have been hit by a perfect storm. A combination of margin calls, higher financing costs and voluntary reductions in leverage have brought asset sales. But as they rush for the exits, many funds have discovered they have been holding similar positions. It seems their models all had been telling them to do the same things: typically, to buy U.S. midcap growth stocks. The losses have triggered a vicious spiral of more margin calls and redemptions from investors, leading to further fire sales. So far, the worst problems are in equity quant funds. Goldman's Alpha fund invests in many types of assets, but its losses stem mostly from its stock strategies. True, some diversified funds have so far fared better and are cushioned by big gains in the first part of the year. And some, such as Renaissance, have spectacular records to fall back on. But that will come as scant consolation to investors who pay its superhigh fees -- 5% of funds under management plus 40% of performance -- and are now sitting on losses. Some of the badly hit smaller funds may not survive. Even if investors are willing to stick around, the managers might not. After all, they can forget about performance fees until they beat their high-water marks, the previous high value used as a base for measuring outperformance. When convertible arbitrage funds were hit by losses in 2004, many simply closed shop. Goldman denies it plans to close its Alpha fund. But after 18 months of horrendous performance, it is now smaller than it was at its launch. Don't bet against it getting smaller still. ABN ABN Amro's shareholders are losing heart. The Dutch bank is the target of two bids, from Barclays and from a consortium led by the Royal Bank of Scotland. But on Friday, the shares temporarily fell below the value of both offers. Part of the explanation is technical. Some merger-arbitrage hedge funds are being forced to sell assets to meet margin calls. ABN would be one of the first assets to be jettisoned. The shares are liquid and have performed well, so many holders would be able to cash in at a profit. But the whole idea of paying a substantial premium for a second-tier bank is starting to look dated. The operational challenges are huge. Also, the falling ABN share price makes the cash portion of the offers -- €66 billion, or about $90 billion, from the consortium or €25 billion from Barclays -- more generous to ABN and harder to justify for the bidders. The consortium's €71 billon offer looks particularly risky. About half of promised cash will be borrowed, at least at first. Also, some of ABN's assets will be kept in limbo while the consortium's members divvy them up. And this hardly seems the time for a midsize bank such as Fortis to launch a €13 billion rights issue, even if it is supposed to be fully underwritten by Merrill Lynch. A cautious regulator would think twice about approving an offer with so many possible pitfalls, even in good times. And these are tough times in the markets. Such reasonable doubts helped ABN's shares close 13% below the current value of the consortium offer on Friday. The Barclays deal looks a lot less risky. It is a simple tie-up that would not weaken the two banks' balance sheets, because new investors have already provided the funds for the cash portion of the offer. ABN shares closed marginally above the current value of the Barclays's bid. That looks fair for now. But if market turmoil intensifies, Barclays too may find a reason to offer less, or just walk away. Foreign Exchange Currency markets have merely wobbled in the earthquake shaking the credit and stock markets. But they could soon suffer their own tectonic shifts. For the past few years, currency traders have led pretty simple lives. They just borrowed in low-interest-rate currencies -- particularly the yen and Swiss franc -- and lent in currencies that offer higher rates, such as those of New Zealand, Australia and the U.K. This easy way of making money may end if global liquidity really tightens, or even if traders begin to think it might. They would become unwilling to bet against interest-rate rises in, say, Japan, which could cause the yen to appreciate and wipe out their carry-trade gains. How likely is it that the financial turmoil will reshape the foreign-exchange markets? Well, the border between economic reality and financial speculation isn't always clear. For example, Australia's terms of trade -- the price of exports relative to the price of imports -- has improved by 70% in the past decade. That provides economic support for the Aussie dollar. But the improvement largely comes from high commodity prices. Those have been helped out by easy credit, which may be at an end. But a few predictions are possible. First, the pound could be a loser. Sterling is at a 25-year high against the dollar. But the U.K. has a big trade deficit and looks unlikely to raise interest rates. That could undermine the pound. Meanwhile, the yen should strengthen. Japan has ceased to flood its domestic market with cash and has raised interest rates slightly. The Swiss franc could rise, especially against the euro. Switzerland's low inflation and low interest rates have made it a popular borrowing currency for traders. But the market turmoil may force its neighbors to lower their own rates. The dollar could be a beneficiary, for a while. True, the U.S. has the mother of all trade deficits, which depresses the value of the dollar. But the greenback has also suffered from the belief that credit market troubles are restricted to the U.S. That's now clearly not the case.