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Trimming the Hedge



September 28, 2007 – Comments (2)

So I'm Barney J. Fife, and I run MUTUAL FUND EPSILON out on Wall St.  Maybe it's a hedge fund, maybe it's just a Fidelity sector fund.  The end of the quarter is coming up so I invite my buddy, Schuyler H. Goldthwaite, out for martinis and steaks at Smith and Wollensky.  Schuyler manages MUTUAL FUND DELTA and we are both concerned about our end of quarter results.

After the sumptuous repast we are smoking cognac and drinking our cigars.  Old Schuyler says to me,

"Say, Barn-ay old chum, you know I've got a lot of that Charnah Mobile (CHL) cluttering up my fuhnd."  Schuyler had tetanus as a child and his jaw never quite lost the lock. 

"Yes, yes indeedy old Schuyler my chap, there's quite a lot of Charnah Telecom (CHA) ovah heah on my plate, yes indeed.  Those wahcky Charnese people."

We haven't broken any SEC regulations, but I've known Schuyler since we were falling off our fathers' Arabian thoroughbreds together at the dressage course.  The plan is set in motion.  Tomorrow morning Schuyler's broker calls my broker - or is it the other way around?  Instead of using our favorite dark pools we put out a pair of reciprocal orders out onto the very public exchanges.  Epsilon shows its willingness to buy a million shares of CHL; at the same time, my broker knows to be alert for buy orders on the books in order to dump our entire holding of CHA.  Meanwhile Delta is offloading CHL in mass quantities and buying up CHA.  Quite soon our relative orders swamp the upside of the order book and the rest of the day belongs to our mutual transactions.  Technical analysts and quants see what's going on and start trying to ride the action down but we have the capital to beat them off.  At the end of the day the market prices of CHA and CHL are both up 15%.

The bell rings and the quarter ends.  Epsilon and Delta have more-or-less traded their holdings of CHA and CHL, which were worth about the same amount to start with; but when it's time to compare Epsilon and Delta to their benchmarks, the close price of these stocks at the quarter inflate these holdings 15% over what they were trading for a week before quarter's end.  Epsilon's results look good.  Delta's results look good.  On October 1st, the prices of both stocks fall by about 15%.  Neither Epsilon nor Delta is really hurt by this, and neither Barney nor Schuyler could give a rat's posterior.

Oh, sure, I hear you.  Can't happen here, you say.

Guess I better just have another Martini. 

2 Comments – Post Your Own

#1) On September 28, 2007 at 7:26 PM, Capsperson wrote:

And a happy window-dressing end-of-the-quarter to you. I haven't heard the reference to "dressage" since Daphne and I competed at the Royal Saddle Club... 

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#2) On September 29, 2007 at 9:30 PM, TMFCHarris (98.68) wrote:

I've always wondered how to spell "wacky" like an East Egg'er, and now I know.
Thanks ikkyu.


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