Well, I guess it's all OK now then... I'll stop worrying, 'cause everything is gonna be just dandy.
Hedge Fund Losses From Epic Valeant Rout Estimated at $5.3B
- Thread starter dealmaker
- Start date
They can try to spin it... but he can't fake the net-liq. $600MM typo. Can't meet reporting date. (edit) Pershing (/edit) pushing to up guidance. One of their top drugs is doing 60% of forecast on revs.
This thing is going tits-up.
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Wait, I thought ValueAct wanted to push down guidance (and prevailed) and Ackman wanted to avoid the bloodbath and wanted to be more optimistic?
But yeah, I have a hard time imagining a warm and fuzzy resolution to this one.
Well then I stand corrected on V-ACT. I had heard the opposite, but kudos to Ubben for the transparency.
Well, being less aggressive than Ackman doesn't mean that ValueACT's lower guidance is transparent or conservative.
In fact; i do not understand how you can give guidance at all in this situation.
http://www.latimes.com/business/la-fi-lazarus-20150306-column.html
When (at least part of) your business model depends on getting insurance companies to pay 2500 USD for a tube of cream that can be had for 20-40 USD over the counter elsewhere, your business can stop the moment those generous insurance companies have had it.
When, on top of that, you have 30 billion of debt to service, you are in trouble no matter what.
Regarding Ackman's option positions (i now re-read Levine's article as well ;-):
I think Levine's PnL-Chart is correct; it shows a steeper curve below 60 (where losses from the puts kick in) and above 95 (where gains from the calls kick in). The key rationale for the option positions was, as stated in the article, to create stock-like returns with a minimum of cash outlay - and not to "go all in" with a ton of short puts.
So while these trades clearly shows Ackman's lack of understanding of VRX risks and his willingness to disregard any sound risk management on a portfolio level, this does not compare in magnitude to other hedge fund blowups (LTCM, this chinese guy or Shkreli who went "all in" into a highly overleveraged bet in order to get back to their high water mark).
Yeah, you're right (and Levine). The PNL graph replicates the short R/R curvature as it goes flat between strikes. I was busy this morning and glossed over it. Odd that he doesn't mention the puts in terms of risk; perhaps he's dumbing it down for the audience.
The slope is essentially the same above/below the strikes. The shift from grey to aqua represents the strikediff less premium outlay.
I don't know how to compare blowups, tbh... What's the relevant metric?
All I would say is that, if you ask pretty much any options guy who has been in the mkt more than a year, they would tell you precisely why you don't do these sorts of trades, regardless of what they look like at expiry. That's the aspect destriero is specifically referring to, I believe, which is missing from Matt Levine's article. Especially if you're already highly concentrated in the name, have no cash to invest further (which is what Ackman claimed when he traded the options) and your position is very large (2nd largest) vs the mkt. It's a classic Brownian bridge risk management problem and you'd imagine a guy running, what, 14 yards should know better. To add insult to injury, he bought call spreads, so the upside is capped, as if he didn't have the cash to pay for the straight calls (which could have maybe mitigated the short vol element somewhat). Like I said, it boggles the mind...
And now much did those caps do to reduce the debit on the structure? Longest is out to Jan17 IIRC. Perhaps a $2 credit on the downside calls. In hindsight it's a band-aid for a bullet wound, but it's the ONLY part of this deal that is marked as a gain.
It's more than a little lacking in candor to imply that it didn't cost them anything to put it on.
Well, look on the bright side, at least he wasn't too greedy and didn't do the seagull for credit
.So I have been thinking about it and I have to say it... This is probably going to offend some, but so be it.
So I don't want to comment on Ackman's outright VRX bet. I am not an expert at the strategy ostensibly used there. In the past, while I didn't particularly fancy Ackman's publicity heavy style (the BBG article where some breathless youngster referred to him as "the Socrates of our time" was priceless), I was relatively neutral. However, this options trade, the more I think about it, is so absolutely and utterly amateurish and misguided, it beggars belief. Now I am pretty sure that Bill Ackman's is not an amateur, so there's something else, much more sinister here.
I referred to the PNL path dependency issue previously. That's precisely what's happening with Ackman's now (and also happened to him at Gotham). The way prudent investors deal with this is to stress test their portfolios by imagining a very adverse outcome that occurs somewhere on the way to glory. If they're not comfortable with what such a scenario does to the odds of them reaching the other pylon of the bridge, they do smth about it (e.g. reduce leverage, diversify, hedge, etc etc). Obviously, any such actions would reduce the trade's upside, but when it's a matter of an existential threat, such a sacrifice is justified. Now this options trade makes it relatively clear to me that Ackman is not just greedy (which is perfectly fine), but that he also couldn't imagine a possibility that he could be wrong. That sort of hubris, in my mind, is a fatal flaw for an investor. No matter how the whole VRX saga ends, I would never trust Bill Ackman with a penny of my money. In my personal judgement, he's a terrible investor.
Please note that these are just my subjective and poorly informed musings. I am happy if people disagree with me.
So I don't want to comment on Ackman's outright VRX bet. I am not an expert at the strategy ostensibly used there. In the past, while I didn't particularly fancy Ackman's publicity heavy style (the BBG article where some breathless youngster referred to him as "the Socrates of our time" was priceless), I was relatively neutral. However, this options trade, the more I think about it, is so absolutely and utterly amateurish and misguided, it beggars belief. Now I am pretty sure that Bill Ackman's is not an amateur, so there's something else, much more sinister here.
I referred to the PNL path dependency issue previously. That's precisely what's happening with Ackman's now (and also happened to him at Gotham). The way prudent investors deal with this is to stress test their portfolios by imagining a very adverse outcome that occurs somewhere on the way to glory. If they're not comfortable with what such a scenario does to the odds of them reaching the other pylon of the bridge, they do smth about it (e.g. reduce leverage, diversify, hedge, etc etc). Obviously, any such actions would reduce the trade's upside, but when it's a matter of an existential threat, such a sacrifice is justified. Now this options trade makes it relatively clear to me that Ackman is not just greedy (which is perfectly fine), but that he also couldn't imagine a possibility that he could be wrong. That sort of hubris, in my mind, is a fatal flaw for an investor. No matter how the whole VRX saga ends, I would never trust Bill Ackman with a penny of my money. In my personal judgement, he's a terrible investor.
Please note that these are just my subjective and poorly informed musings. I am happy if people disagree with me.