Monday, September 25, 2006


The Recapitulator reads that Morgan and Goldman profited mightily from Amranths downfall AND WAS LIKELY ON THE OTHER SIDE OF MANY OF AMARANTH'S POSITIONS. We have written about this front-running practice before, and astute readers will gather many parallels linking this type of behavior to the burgeoning reinsurance market that many (most?) of the large Hedge Fund players are entering into.

Again, with tepid waters and no sharks, diving into a market (reinsurance) that one is NOT an "expert" in is preferable to navigating waters that offer a 100% probability of "informational leakage" (straight to the prop desks of the your prime broker!)

Record profits at the large investment banks indeed...record PRIME BROKERAGE profits. One does not need an advanced degree in statistical analysis to posit some reasonable causes for this correlation.

Tuesday, September 19, 2006

Thailand...always Thailand...

The sycilla of the makets has once again demonstrated its self-appointed role as canary in the mindshaft for emerging market risk.

...and once again, the world is reminded that the U.S. $ is the reserve currency of choice whenever political instability requires a safe haven to move (hide?) capital. This is another reason the Recapitulator has been bullish on the dollar - human behavior certainly demonstrates some mean reversion (with an optimistic drift term thrown in there to account for the massive upward surge mankind has experienced in the last 180 years) - and things have been historically quiet on the political front as of late.

Monday, September 18, 2006

Hedge Funds in the news... Amaranth blows up.

It appears to the Recapitulator that Amaranth decided to corner the market and got subsequently (in video gamer parlance, of which the Recapitulator is a member) "pwned".

Its difficult to tell the positions initially, but was is known is that they were "very" long on Nat. gas spreads (betting that spreads of spot and future Nat. gas prices would continue to widen). Nat. Gas fell by 11% or so last week alone, and with (at least) 5-1 leverage, the fund basically blew up.

Ramifications have ALREADY effected the credit and convertible markets, but global financial markets are so deep and liquid that this debacle has already been well-contained...although some investment banks (Morgan among them) may feel some pain as creditors to the fund.

There will be the usual calls for more regulation and "trasparency" (as if Hedge Funds did not have enough problems protecting their positions from their prime brokers who front run them every chance they get) amongst an extremely valuable asset no avail as cool heads realize that secrecy is paramount if Alpha is to ever exist in investment land.

There are the usual lessons to be learned regarding hubris...the trader, Brian Hunter, is the latest physics/math wunderkind to learn that linear trends are not necessarily predictive of future outcomes (a slight understatement, yes). The Recapitulator has informed you about the commodity cycle being old...when the public starts investing, the exit door should beckon.

There will also be extensive discussions concerning the agency problems associated with someone like Mr. Hunter who is basically incented to take massive risk (and hope his risk management division continues to play the "hot hand") for the hopes of outsized profits. This is very much a lesson in risk management.