Thursday, August 09, 2007

One Shoe Dropping....


What is the sound of one shoe dropping? Squisssh? Plop? Crack? You can take you're pick. But what I CAN tell you is what it looks like (see picture left). This is a yearly chart of "BMNIX", the Laudus-Rosenberg Market Neutral Fund, an open-ended US Mutual Fund. It is a quantitative in nature (per Rosenberg's long experinence in risk-modeling), highly diversified (hundres of names long and hundreds short), uber-neutral, (thus equal amounts of long versus short stock), no leverage per-se, although it does, I will suggest, have some style bets, chiefly some small-cap, and some value. Which given current circumstances is about as appealing as eating a rotten oyster or (I can just about imagine) catching a venereal disease.

The Fund has a daily STDev of perhaps 0.35% at the outside, reflecting its well-hedged and diversified nature. What in Merriweather's name could possibly flatten this fund like 'possum-on-a-country-lane minus-seven-percent roadkill? Minus 7% in a week!! What is probability of THAT! Poor stockpicking? Happenstance? Black Swans? Pari-passu risk? We will see and hear more today.

Interestingly, Bloomberg has struck a deal with Algorithmics to make their risk software available on the Professional terminal. This includes, VAR, scenario analyses, and "stress-testing" where they take a variety of risks that scare the living pooh out of risk managers (and principals) alike: "Sept 11", "Flight-to_Quality" , "Small-Cap Puke", "Rising Rates", "Fading Recovery". But as I suggested yesterday., the risk that will inevitably bite investors' collective arses will be the risk that has not been seen before. In this case, that risk is a systemic de-leveraging cascade. This is different than a flight to quality. A "flight-to-quality" substitutes low risk assets for high-risk assets. Systemic de-leveraging destroys both assets AND liabilities, shaking up the co-variance matrix of relative pricing in the process, and most-likely laying waste to lots of excess in asset prices.

BMNIX's rapid price destruction is the tip of but one shoe to drop, the reflection of some's forced liquidation. But sitting atop this , are a whole array of expensive securities squeezed up by passing temporary demands for liquidity, but which entropy will inevitably see return to more sensible levels, so dropping the second shoe. The bold will short them hard as others are squeezed. Most will watch in awe and wonderment. THe carnage will yield wonderful medium-term opportunities to buy assets on the cheap, from those who surfed too-close to the edge and perhaps terminally de-boarded...

11 comments:

Anonymous said...

" ... the risk that has not been seen before." Hmmm I wonder what the Japanese housewives are thinking? Maybe I can channel their thoughts through ouija board.

-pi

Charles Butler said...

For which neither panacea nor penicillin are available.

Anonymous said...

So much for "market neutral". Great find. Looking scary. AXA "money market" thinng prtty scary too.

http://www.creditflux.com/digest/2007/08/03/axa+im+shores+up+money+market+funds+invested+in+subprime.htm

Anonymous said...

Charles, I was writing in reference to timesonline article:

The kimono traders

Japanese housewives have ditched their traditional subservient image for the world of currency trading – influencing both international markets and Japan’s economy. Leo Lewis reports from Tokyo

http://women.timesonline.co.uk/tol/life_and_style/women/article2187250.ece

Apologies, if you're already aware of this article.

-pi

The Olive Oil Gazette said...

Pi

It was a general remark on STD's, being the metaphor du jour around here. The story's a good one, though. Who wooda thunk?

CB

Anonymous said...

What a piece of shit fund. It's done nothing for 5 years. What, do they long/short the same damn stock?

"Cassandra" said...

It IS a piece-o-shite fund. What's fascinating is that the daily STD went from 0-to-!@#@** overnight cause somebody else decided to liquidate. Call me a wuss...but I like to sit in the exit row myself

Anonymous said...

Liquidify! Liquidify! Liquidify!

Or just get some from ECB

wcw said...

'Til recently, it was a great fund: for the fund group and its manager, who swallowed its returns in fees.

FD: I interviewed with Rosenberg a couple times the last few summers, and they didn't hire me. I liked the people I met, but I can't say I don't take pleasure in this denouement.

Etz3l said...

Please join city @ http://www.tickerforum.org/cgi-ticker/akcs-www?post=2868

Anonymous said...

Big liquidation triggers hedge-fund turmoil

http://tinyurl.com/27qeh4