Thursday, September 04, 2008

Couple of Questions RE: Ospraie...

Some years ago, when Russia defaulted, a quite successful and well-regraded global fund named Everest Capital run by Marko Dmitrievic (sic?) had a harrowing near-death experience resulting from sizable GKO positions. Their assets droppped substantially with losses and some redemptions, but they made their case to their investors about what they did, and (perhaps surprisingly in the Darwinian world of Hedge Funds) many stuck it out. Yes fifty percent (read 50%) below your high-water mark means working like a mutual fund plebe for a few years with NO performance fees. Yet they persevered, and the investors who stayed with them were satisfied as they got paid on their short S&P hedges at the turn of the century and tagged the BRIC phenom rising like a phoenix out of the tech-bust.

So one must ask "why NOT Ospraie?? Why is Dwight Anderson bailing out? Where is the longer-term story or table-pounding about the long-cycle? Surely most investors need/want something like a commodity specialists in their FoFs or engineered portfolios...why not Ospraie? Is it shame or is the world so Darwinian that everyone just wants their cash back to give it to the luckier, or more astute traders who for whatever reason got it more right, or less-wrong than Mr Anderson...this time. He's presumably got Lehman's cash (even if its 50 cents on the dollar in value) and accumulated fees from the last four years which even after a fifty percent haircut is wealth beyond most successful traders' wildest imagination which like Everest before him, provides a stable asset base to punt around in those things that he presumably knows best.

Or maybe he has been hit with self-doubt about his prowess, or perhaps doubt about the longevity of a commodity boom in an overlevered liquid-hydrocarbon-challenged world where demographics in the rich countries (and China) will soon turn demonstrably for the worse, and authorities may finally acknowledge that it's excess demand that is the real problem. For what could be worse for commodity prices than parsimonious scaling down and conservation, for whatever reasons be they ecological economical, or philosophical. I do not pretend to know the answer.

But I look back on Everest's commitment, to do their best for themselves and their co-investors and I see an admirable integrity. No closing because they are too far below the high-water mark. No shuttering due to shame or embarrassment. OK maybe it was tax or some unknown considerations. But not being uber-cynical, I still cannot help but wonder about Ospraie, for Mr Anderson is an admitted substantial co-investor in his Fund. And I wonder how this will look to those sitting on the fence in the debate over whether the HF model is stupid and wildly asymmetric - paying gobs on the upside, and bolting with the cash at the first chance when adversity strikes. Maybe EVERYONE wants out, and I am wrong to raise the question of integrity, asymmetric payouts and disincentives to continuity. Or maybe everyone is simply tired of paying "alpha fees" for beta. We'll probably know the truth soon, in any event.


Anonymous said...

Your post caught me musing (again) on the incentive effects of hedge funds as a way for insiders to use shareholders' money to fund a call option that they own personally... From running a long/short fund since 2004 and talking to many participants in the industry over that time it was clear that towards '06/'07 it had become increasingly an inside game. It wasn't style or performance that mattered, but size - who you could bring to the table on the funding side because it was all about payoffs to intermediaries. It was all very short term.

It reminds me of the latter years of the dot-com boom. You simply could not get into one of the hot VC funds, or one of the hot IPO's, unless you brought another deal to the table. Company officers were awarding IPO business to brokers that could get them personally into other IPO allocations; company officers were taking deals to VC's in order to get their own super money into the VC's funds. Obviously the losers were those like minorities not in a position to obtain the side benefits.

People running hedge funds - Wallstreet insiders; clients of hedge funds - Wallstreet insiders; officers approving credit to hedge funds - Wallstreet insiders, winnings accrue to - Wallstreet insiders; losses funded by - ordinary members of pension funds (and likely taxpayers as well).

I think Ospraie's cynically walking away, as you pick up, is due to the fact that real investment management is actually very difficult and a lot of hard work. They had a free call-option that is now well out of the money. It cannot be re-struck unless they re-brand. The quicker they distance themselves from the whole thing the better position they'll be in when the window opens again. The same people will facilitate the next deal.

Great pic, by the way.

Anonymous said...

judging by today in the US and then Asia I think everyone wants out as they simultaneously realize a solid bottom was not in after all.
Deleveraging has to fully play out, lehman is the public tip of a larger iceberg..

Anonymous said...

The simple answer to your (excellent) question is that there seems to have been a clause triggered by a 30% drawdown that would have automatically lifted constraints on redemptions. Given the timescale of the liquidation -which tells us that the portfolio is massively illiquid - allowing people to get out would have simply obliterated anyone who wanted to stay in... (This is from Mr Anderson's letter: check out the signature, by the way. Not only is the spelling of the fund odd, but I'd be interested in having a psycholoist's view on his handwriting...)

One more poetic observation: the osprey is a majestic and beautiful bird, but it's said that if their greed leads them to attempt to catch fish that are too big they are unable to take off having dived for their prey. Their talons are barbed like fish-hooks, so if they can't take-off they drown. Am I alone in seeing an analogy here...?

"Cassandra" said...

anonymous 4:40am

Thanks. As you point out, no one rightly wants to be the bagholder of illiquid shite following forced liquidation.

No. What someone of not-so-high moral character would attempt to engineer in such instance would be more or less large and indiscriminate market impact pari-passu with other fund investors creating an information asymmetry in those things impacted, and then take the other side near completion for one's own account. At least that is how less scrupulous managers would liquidate against their will and when trading against their instincts.....

Anonymous said...

Cassandra, As usual an insightful and well thought out post.

I have an unrelated question that I'd would love to hear your views on, as you are in Japan (as am I). What do you think of the Fukuda resignation, the Aso ascendancy, and most importantly, what should be done for Japan and if that will ever happen? I am hearing that Japan is, as are most other nations, slowing down/in recession due to the global fallout, but the misguided/unguided policies are making things far worse than they ought to be. Is there any hope for our ailing country?

Many thanks.

"Cassandra" said...

Anonymous, For the record, I am not in Japan, though have been a specialist investor in Japanese equity markets continuously for 17 years. That said, you will understand I am not a qualified insider and my views on the political have little merit outside (as Bear Stearns argued in the Angell case) of entertainment value.

As the PM, I thought it was well understood that Japanese PMs (or all but the most unusually charsimatic and powerful within their party) are virtually irrelevant. Nothing I've seen over the three dedaces I've been observing caused me to alter that belief. Power seemingly lies elsewhere in a consensual society.

As for Japan, the lack off consumer debt, conservative corporate positions, good bank balance sheets, and low amplitude of employment change volatility will make Japan's experience to the great deleveraging less traumatic than for America. Not that it won;t hurt (It WILL be painful in Nagoya!) but in comparison to what America will experience from credit withdrawal, you will be glad you are in Japanland and not USA.

Thanks for your kind words.

Anonymous said...

Ummm...Marko received a large capital infusion from the Soros group at the bottom. Otherwise, I'm sure he'd have bailed. So much for principle!

Anonymous said...

I recall that and will take your word that he would have done thus. In any case my point was not to romanticize the old days of a decade ago, but highlight the twisted one-way incentives that encourage - even necessitate - less-successful or temporarily unlucky shooters-of-the-moon to walk.