Thursday, December 20, 2007
Feckless Lion or The Wizards of Arb
There's been no shortage of schaudenfraude that's surfaced from observers regarding Goldman Sach's Global Alpha hedge fund managed by Mssrs Carhart and Iwanowski. It's performance has indeed been more-than-dismal. And it continues to be challenged in the year's waning months, if the headlines are correct. It has admitted that it will suffer large redemptions and many commentators - yours truly included - took a few cheap satirical pot-shots at them and their GS overseers, though I can say in my defense that they were for fun and amusement rather than any inherent mean-spiritedness.
That said, GS Global Alpha appears set to live on, albeit in more scaled-down form. This begs a more serious and related question that some readers will know perhaps only too well, and that all concerned should consider if only philosophically. It was alluded to in their letter to investors that made the rounds, which is: "As happens to many traders and investors that experience large losses, have they, or will they, lose their ...ahem...balls??!?" Some who get clocked by Mr Market are, psychopathic, and return psychologically unscathed, often none-the-wiser. Others - the ones to be emulated - learn from their mistakes and adjust accordingly. But some never recover. They do community work. Go back to school. Visit an ashram, put their money into "Certificates of Deposit". Or when they do eventually return to markets, they do so without the willingness to sensibly tolerate loss or risk, commensurate with the expected returns of their investment style and pursuits.
I know not of the early trading history of Mssrs Carhart and Iwanowski, and/or what lessons they'd learned or troubles they'd encountered before 2007's unwelcome spanking. Some, such as AQR have been caned so badly before that even a low double-digit negative year entirely consistent with prevailing factor movements is barely a cause for concern except insofar as one must assuage general investor fear and rote questions. In my time, I've seen the gamut, and the saddest thing to witness is those whose egos are so visibly effected that their subsequent confidence and judgment becomes irreparably compromised. The vision of Tom Cruise, in "Top Gun" unable to "engage the enemy", and avoiding risk after he scorched his plane killing his co-pilot due to his own overly-aggressive error (and some jet-wash) vaults most poignantly to mind. Professional help is often required. In the world of high water marks, such fear of engagement is all too often, terminal.
In their Q3 letter, they said that in the future they'll be employing less leverage. For everything that happened in late July and August, the world is not THAT different or that much more risky for their strategies. There always is a right gearing and a wrong gearing for a strategy or a portfolio of strategies. The risk that volatility would rise again from unnaturally low levels was always there, whether folks chose to ignore it or not. On the surface, with a +40% in CY06, and Global Alpha's admittedly too-high prevailing leverage in 2007, their decision to ignore it appears self evident (in this commentators opinion). And so the question remains: Is this decision to de-leverage (going forward) a de-facto mea-culpa of massive pilot error or a reflection that the managers (personally) and their GS overlords (perhaps also reflected by their decision NOT to pony up further) no longer have the stomach for the strategy risk?? Food for thought.