Crosshair (82.52)

Stupid Money Returns to the Market

October 23, 2009 – Comments (2)

This morning, the Financial Times reported that John Meriwether is starting a new Greenwich-based fund that will employ strategies first used during his days in the bond arbitrage group at Solomon Brothers in the 1980s. As you may remember, Mr. Meriwether presided over the spectacular collapse of his fund, Long Term Capital Management. What made the event remarkable is twofold. First, the team at LTCM was composed of some of the brightest minds in economics and mathematics, not to mention two Nobel Laureates, Myron Scholes and Robert C. Merton. Ostensibly, the fund was endowed with sufficient talent to allow it to spit out alpha with fair regularity. This, however, was not to be. After a short taste of success, the fund failed miserably and faced imminent collapse, threatening to take down the entire financial system with it (sound familiar?).  Second, the bail-out which averted the disaster was conducted solely by private agents, not the government. Albeit, the Federal Reserve Bank of New York was active in organizing the bail-out; it did not, however, provide a dime to the failing hedge fund. If you would like learn more about this event in our financial markets’ history, I direct you to When Genius Failed: The Rise and Fall of Long-Term Capital Management (2001; Random House) – it is a must read.

What is astonishing about the FT report is the fact that Meriwether has already received a second chance to redeem himself. How did he fare this time around? The fund, JWM Partners LLC, was forced to shut down after losing 44 percent from September 2007 to February 2009.

It is nonsensical in this current environment - one where job losses are mounting and employees are forced to demonstrate how they contribute to their employer’s bottom or else be shown the door – that we are able to find people who are perpetually showered with opportunity despite horrid track records.  Shouldn't capital flow to the areas which produce the largest returns?

It is clear that risk appetite is back, evidenced by the stupid money seen floating around. In parodical fashion, I propose the launch of a new investment fund, where all reason is abandoned and buy/sell decisions fall prey to the whims of the moment.  We will give our newly formed investment pool a name which alludes to our seemingly complex strategy being employed: The Long Option Spread Equilibrated Regressivity Fund (in case you missed it, LOSER Fund).  The fund will charge astronomical management fees, as these seem to do little to deter investors.  Then, when the fund collapses, we’ll pack up and start all over again, as surely more money will be made available to us just itching to disappear.