Sorry Letters, Accident Scenes and Hedge Fund Asteroids

Due to the overwhelming amount of news coming out of Hedgistan last week, we take a break from our usual in-depth analysis and opt for more salacious stories of hedge fund carnage…

Mea Culpa Capital Management, LLC

Thanks goes out to AllAboutAlpha media partner Opalesque, for assembling a number of recent letters to investors from quant managers.

In case you don’t have the time to read them all, we’ve provided our take on the main points below:

AQR: “Okay, so computer models don’t always work.  But that’s only part of our business.  We have tons of other funds!  Move along now folks.  Nothing to see here….”

BGI: “This creates lots of new opportunity if you have the capital.  And hey, we’re huge!”

Black Mesa: “Couldn’t stand the heat…Got out of the kitchen…Still really hungry, though, and plan to raid the fridge at the earliest possible opportunity.”

Highbridge: “Hey.  Look around.  It’s not just us!”

Renaissance: “Hmmm.  It seems that other funds had the same trades as us.  Who knew?!”

Sowood: “I guess our kids aren’t going to get into Harvard now, right?”

There is an important common theme running through all of these letters, and Jim Simons touches on it in his letter to investors.  Most of them feel that they were all (unwittingly?) in the same trades.

Highbridge Accident Scene (warning: graphic images)

There’s a reason why most hedge funds never want to become mutual funds.  Aside from having their leverage and short-selling wings clipped, they have to put up with the schadenfreude of yahoo’s like us picking apart their track records.  Highbridge has the unfortunate honour of managing one of the few mutual fund versions of a quant hedge fund.

So for all you rubber-neckers who are curious about what a quant fund accident scene looks like, here you go:

Google Fund Returns

Morningstar Profile (free registration required)

Article recommending the fund after it weathered a storm earlier in the year (ditto)

Parent company’s (JPMorgan’s) fund fact sheet

The “Scariest Environment Imaginable” (warning: more graphic images)

Last week, we discussed BNP Paribas’ decision to throw in the towel on calculating NAVs (press release announcing suspension of NAV).  Well, as you might expect, French regulators hauled the firm’s CEO onto the carpet a few days later and said he has some splainin’ to do.

Like Highbridge, BNP Paribas also finds itself in the uncomfortable position of being fully transparent due to the regulatory status of one of the funds affected by the asset backed securities mess.  The fund is called Parvest Dynamic ABS and it’s managed out of London by Fischer Francis Trees & Watts.

Here is the cumulative return of the fund since inception (available here at – select Euro-view, then hit “update”):

As you can see from the fund’s fact sheet, it was highly diversified.  Not only did it hold residential mortgages, but it also had a healthy whack of non-US mortgages.  And for the preponderance of caution, it also held a large chunk of collateralized mortgages.  Finally, to make sure it wasn’t exposed too much to US homeowners, it held nearly 10% in securitized credit card debt.

Looking under this fund’s hood reminds us of the scene from the movie Armageddon when Billy Bob Thornton’s character tells Owen Wilson’s character about the asteroid upon which he is about to land a spacecraft (click here for audio).

Dan Trumen (Thornton): “…Two hundred degrees in the sunlight, minus two hundred in the shade. Canyons of razor-sharp rock. Unpredictable gravitational conditions. Unexpected eruptions, things like that.”

Oscar Choi (Wilson): “So basically it’s the scariest environment imaginable. That’s all you had to say, the scariest environment imaginable…”

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