Fund loses 600mil (15%) doing spreads

[ironchef]

A 1*4 ratio spread for example leaves you naked 3 options... That is what this fund did.

http://www.futuresmag.com/2012/08/31/walczak-finds-safe-harbor-options

"The strategy uses a wide variety of ratio spreads, butterflies and offset butterflies. “It is basically 1 x 2s, 1 x 3s, 1 x 2 x 1s.."

Thank you for the link.

The principal explained why he traded spreads instead of just selling premium. I don't think he is dumb as this misstep is his first since he started his fund. In fact his track record was outstanding: He produced returns in excess of 22% a year compounded yearly and never had a losing year.

The mystery is I don't think he followed his own rule placing this trade in the current market uncertainty?

 

[ironchef]

There are all sorts of reasons to utilize these types of strategies, some kinda valid and some monumentally stupid. It appears that these guys were motivated by the latter. I'd be happy to expand further, if you like.

Please. I appreciate it.

 

[R1234]

Every...type of strategy/trade is essentially "garbage" ...the only difference is that if they happen to be Winning strategies, or trades,...then they are now called Genius trades, or a genius trader

That is true but this strategy was essentially crap even before it blew up. Red line is the strategy and green line is the S&P500. And a lot of this stuff gets sold to unsuspecting mom and pop investors. An example of "non-fiduciary" behavior of brokers.

 

[ironchef]

That is true but this strategy was essentially crap even before it blew up. Red line is the strategy and green line is the S&P500. And a lot of this stuff gets sold to unsuspecting mom and pop investors. An example of "non-fiduciary" behavior of brokers.
View attachment 170930

What is the red line - HFXAX? Never mind, I just asked Dr. Google and got the answer.

 

[ironchef]

Thank you for the link.

The principal explained why he traded spreads instead of just selling premium. I don't think he is dumb as this misstep is his first since he started his fund. In fact his track record was outstanding: He produced returns in excess of 22% a year compounded yearly and never had a losing year.

I take back what I wrote. After reading the article again, found it was written in 2012 so his fund had been around only for ~4 years at the time, not a true long term track record.

 

[sle]

so why the trades, what were the rationales, probability, risk-reward? Maybe by understand their thought processes I can learn something useful.

If I had to guess, he had no ideas in a a specific market environment and put up something that kinda sorta made sense. It's a common thing in the fund industry, due to fairly high costs you feel like you are bleeding money if you don't have anything in play. People end up throwing shit at the wall and see if it sticks. Sometimes, it not only does not stick but even falls on your head.

 

[ironchef]

If I had to guess, he had no ideas in a a specific market environment and put up something that kinda sorta made sense. It's a common thing in the fund industry, due to fairly high costs you feel like you are bleeding money if you don't have anything in play. People end up throwing shit at the wall and see if it sticks. Sometimes, it not only does not stick but even falls on your head.

Thank you for the comments and explanation.

I have never met anyone running a mutual fund or a hedge fund or a private equity...Never used a financial planner either so I really don't know how they operate.

Best to you.

 

[Sig]

That is true but this strategy was essentially crap even before it blew up. Red line is the strategy and green line is the S&P500. And a lot of this stuff gets sold to unsuspecting mom and pop investors. An example of "non-fiduciary" behavior of brokers.
View attachment 170930

Lots of mom and pop types meet the qualified investor requirement to invest in a hedge fund?

 

[R1234]

Lots of mom and pop types meet the qualified investor requirement to invest in a hedge fund?

Who told you it is a hedge fund? Its a mutual fund with a $2,500 minimum.

 

[Sig]

Who told you it is a hedge fund? Its a mutual fund with a $2,500 minimum.

My bad, fixated on the "hedged' in the name I guess!