Monday, March 16, 2009

Don't Dish it Out If You Can't Take It

The wind was blowing 30 knots, whipping ice-crystals into exposed orifii. In the near white-out, looking down from perch on the lift I was able to make out a lone young female boarder who'd missed her drop and now had a most long and heinous traverse. She was putting on a brave face, and through the howling of the wind, and in-between her apparent tears and sniffles I could hear her repeating the mantra "Boarders don't cry...boarders don't cry...boarders don't cry...."

Similarly, there is more than a little irony in today's FT report, highlighted by Gwen Robinson at FT-Alphaville (Tokyo) that numerous Hedge Funds are planning to sue Porsche over the sports-car manufacturer's perfectly-executed Hunt-like squeeze of VW shares that snookered hedge funds and traders, large and small, the all world-over. Now before I am accused of mimicking Private Eye's Glenda Slagg, let me say that I don't believe Porsche's actions were particularly noble, and were at best in the murky grey nether-regions of financial legality. Having said that, despite my career as a professional arb, I do (from a purely technical standpoint) admire Porsche's patient setting of the trap before springing it's blitzkrieg with Rommel-like precision over-running any and all VW shorts misfortunate in their timing, leverage or position-sizing.

I should indentify and empathize with the squeezed for I often root for the underdog and have always played The Game by the rules, and dislike when dishonesty and malfeasance triumphs (even temporarily), gaming the system, arguably at the expense of more virtuous or long-term investors (or HFMs own investors). I realize this sounds sanctimonious, but I too have been at the game long enough to have been on the other side - occasionally too early like the VW shorts - of virtually every type of shenanigan ever plotted. conjured, or imagined. And a meaningfully large percentage of these have been nudged, cheered, lead, architected, sculpted, orchestrated, and cajoled, by hedge funds - quite likely the very same ones now suing Porsche. Whether the predation of shorts, trading on material non-public information, tape-painting, end-of-day/week/month/quarter/year window-dressing, stop-fishing, front-running, option-leans, illegal short-sales, collusion with other like-minded similarly-interested investors, using OTCs or other paper-smoke-and-mirrors, options to avoid SEC filings, sponsoring bogus research, buying early release of research, worming clinical-trial results, cornering stocks, ambushing and killing entire hedge funds, front-running new-issues, death-spiraling Reg-d issues, mutual-fund timing, all these are just the run-of-the-mill man-made (often hedge-fund made) market-hazards one must contend with.

Yet, despite the aforementioned, the cautious and skeptical contrarian (if I be an example) can successfully overcome them. Diversification, prudent position sizing, keen observance of the structure of crowded trades, conservative leverage, understanding as precisely as possible when and why something is not doing what one expects or forecasts it to do, who (or whom) is responsible for a position NOT doing what one expects all can contribute to preventing the horror of being checkmated whether by an HF or a would-be Porsche. Lose a pawn? Sure! Maybe even sacrifice a knight. But live on, and learn. So, if I, an honest plier of the trade can withstand the humiliation of having my stock called back after some unscrupulous fund has ramped-and-lent and ramped-and-lent, or suckered into buying a dip in-front of an earnings torpedo, and still live to fight another day, because it is the nature of The Game, then surely those playing The Game with greater abandon adhering to fewer rules should take their lumps like men, and admit that from time-to-time Alekhine will somewhat epicly have them for lunch.


Charles Butler said...


That's all well and good, except for the minor inconvenience of equity indexes. On one of those days, all euro markets solidly negative, except DAX which shone. The structure was VOW up huge and the remaining 29 components all down - with 12 of them of over 5%. The collateral damage to long names with an index hedge was immense, and not conscionable. It should be the Eurex taking them court.

I notice, from the prior post, that you haven't even moved in to the 'hood yet and are already having a go at the neighbours. We've already called the Welcome Wagon.

"Cassandra" said...

CB - Yes, basis risk can be a bitch. The authorities IF they were going to do something should have been all over it at the time of the crime.

I think its hilarious (and sad) that hedge funds are suing given their prevalence of surfing the grey areas and bending the rules. Of course some are honest, and have been caught in the jet-wash. But irony is irony....

I was waiting for your acknowledgement of my choice of photo for the Cheney snip.

AceFace said...

I think Porsche "outhedgefunded" the hedge funds. I'm sure the hedge funds themselves would have done the same things if they were in Porsche's shoes.

Charles Butler said...

Looked like bait. Smelled like bait. Might bite another day.

With regard to the VOW business, there have been a number of incidents aside from this one in the past while that might cause one to question the factual basis for German financial self-righteousness. Take as a signal the recent general tightening of EMU yield spreads as the bund itself drops notably in value - Greece being the glaring exception to this.

Anonymous said...

I have been reading your blog for some time and enjoy your comments. But I had to respond to the Alekhine reference - it's been so many years since I have seen that name in print. Actually when I first saw it - I had to look it up and check the spelling (that's how bad my memory is). Most players come after the Fisher era - so Alekhine is mostly forgotten. When I competed, I surely lacked his brilliance - so relied more on Nimzovitch's positional techniques. Some of his "hedgehog" strategies may have helped during the past year so of financial turmoil.


Why Is John Galt? said...

Saw Guernica in Madrid in '82. Picasso left instructions that the painting could not be shown in Spain until the Fascists were gone. The family decided in 1982 to allow the painting back into Spain. It was in the Prado, behind a huge piece of blastproof glass.

花蓮 said...