Meriwether's second fund

Yesterday’s news but I’m surprised nobody’s posted about this http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aN2lwUiCKGMM I have a feeling he’ll start another one…

Nah, once bitten, twice shy. I think he’s past it. He’s taken two hard losses. What man would want to go down that road again? He won’t be able to invite enough capital to start a new one.

yeah there is no money that will follow that. A bunch of people who got screwed as he quit and started a new one to avoid a high-water mark…no way anyone should put capital with that guy again.

someone posted it already. At one point he actually returned money to LTCM investors and they begged him to take more capital.

haha I love his fund’s name: “Relative Value” they could have a catchy slogan: “While the competition will lose 50% of your money, we trump competition with our Relative Value fund and only lose 30% of your money!” “Invest with us.”

Alucard Wrote: ------------------------------------------------------- > Yesterday’s news but I’m surprised nobody’s posted > about this > > http://www.bloomberg.com/apps/news?pid=newsarchive > &sid=aN2lwUiCKGMM > > I have a feeling he’ll start another one… Pffft… jeez you digging at the bottom of the wires or something? :wink: http://www.analystforum.com/phorums/read.php?1,1026158

There’s not a shadow of a doubt in my mind that he’ll be able to attract investors to a new fund in the fairly near future if he wants to. On a separate note, am I correct to assume that all you ladies and gentlemen that talk about your trading strategies on here are convinced that you are better investors than Merriweather and his partners and employees, who have presumably used world-class facilities and resources, have been? If so, I’m curious as to what you think provides your perceived advantage over them.

Captain Windjammer Wrote: ------------------------------------------------------- > There’s not a shadow of a doubt in my mind that > he’ll be able to attract investors to a new fund > in the fairly near future if he wants to. > > On a separate note, am I correct to assume that > all you ladies and gentlemen that talk about your > trading strategies on here are convinced that you > are better investors than Merriweather and his > partners and employees, who have presumably used > world-class facilities and resources, have been? > If so, I’m curious as to what you think provides > your perceived advantage over them. You mean aside from not having spectacularly blown up twice? Now if you had said salesman…I’d agree, he’s pretty untouchable.

Captain Windjammer Wrote: ------------------------------------------------------- > There’s not a shadow of a doubt in my mind that > he’ll be able to attract investors to a new fund > in the fairly near future if he wants to. > > On a separate note, am I correct to assume that > all you ladies and gentlemen that talk about your > trading strategies on here are convinced that you > are better investors than Merriweather and his > partners and employees, who have presumably used > world-class facilities and resources, have been? > If so, I’m curious as to what you think provides > your perceived advantage over them. Because I don’t pick up pennies in front of a steamroller. Sorry Roger Lowenstein - I stole a line from your book. Fixed Income Arbitrage, as a strategy, is flawed on many measures and doesn’t provide an adequate margin of safety. The whole premise of fixed income arbitrage is to turn 2-3% returns into 20+% returns with the use of leverage. All of this is based on the premise that all asset classes / securities / etc. are mean-reverting over short periods of time. Anyone can earn 2-3% returns - it’s not very difficult. The issue is (because of lack of skills in other more fruitful areas of investing) the only way to earn a respectable rate of return and justify charging a fee to investors is to lever it. So we’ve covered: 1. Risks of leverage 2. Inability to earn true returns without the use of leverage Now let’s look at: 3. The asymmetry of return distributions (since leverage cuts both ways). I.e. a good year my gains are CAPPED. Period. They are CAPPED. The downside loss is potentially unlimited (100%). 4. Fallacy of mean-reversion. While securities are generally mean-reverting over the long-term, it is not necessarily true over the short-term. The market can stay irrational longer than you can remain liquid. So in summary, I think I’ve explained why I am a superior investor than John Merriweather. I’ve already won the battle before it was ever fought (now I credit Sun Tzu). Notice how many fixed income arb shops blew up in the last cycle in the matter of days. Platinum Grove (ex LTCM alum - suprise…no), JWM, Endeavour, Highland (they run a FI arb fund as well as a number of fixed income strategies), and so on.

+100, took the words right out of my mouth…

You make good points about his strategy. You guys will probably blow up too sooner or later (if you haven’t already) however.

How someone can “blow up” if they don’t use leverage? Your assets can go down but you can’t blow up.

There is much less of a risk of blowing up if you don’t use leverage and look very long-term (10 years). However, you’re right in the regard that it all depends on how your investors feel about you, i.e. Mark Sellers

My general point of course is that as I understand it Merriweather had a lot of success as a proprietary trader and then worked with some of the finest minds in finance at LTCM and presumably at his recent fund. He seems to know what he’s doing to a certain extent (or at least has been able to convince others that he does) and I doubt that the “picking up pennies in front of steamrollers” idea (though I think it’s exactly right) would be new to him and his colleagues - presumably they understood the risks and thought they could manage them. Again, good points about their strategy, but is easy to say you’re a better investor than one of the better-known names on Wall Street and much harder to achieve consistent outperformance over the long term. I continue to be surprised not so much that people believe they can (the entire investment industry is built on that belief, after all) but that there is so little skepticism about people’s real ability to do so, not just among garden-variety financial planners etc. but also on a board like this where people presumably know more.

I am using “blow up” to mean just incur large losses that eliminate all or most of someone’s accumulated apparent outperformance. Leverage is obviously not required for that and I think that’s the right usage of the term. For example, roughly speaking if you manage to beat the relevant index by 1% a year for 10 years but then trail it by 15% the next year, you will have been wasting your time (to the extent it was spent in actively managing that portfolio) up to that point.

Nicholas Cosmo convinced people that he knew what he was doing before we was caught running a ponzi scheme. Hitler convinced an entire nation to commit genocide. I don’t give that argument much credit. People will believe in anything as long as you put on a good show. Part of the issue with Merriweather was that he thought he was amongst the finest minds in finance. It leads to hubris and overconfidence. The reason why he can’t control risk is because he has this steadfast belief that he is always right. Investors have to be flexible and acknowledge their flaws and shortcomings. You are spot on in your reference to the “75% of investors believe that they are amongst the top 25% of investors” syndrome. My personal goal for investing is not to consistently beat the bogey. More times than not, this outlook induces unnecessary and irrational risk taking. My principle goal is the preservation of capital. Rule # 1 is don’t lose money. And Rule # 2 is don’t lose money. If you focus on the downside, then the upside will pretty much take care of itself. I don’t presume that anyone on this board has super-human ability nor do I assume that people think I do either.

You’re absolutely correct–it’s overconfidence bias. But there are definitely proven approaches that help slant the odds in your favor, wouldn’t you say? How can a long fund beat the index over the long-term if it holds 150 positions, or a fixed-income arbitrage fund if it has negative skew? I still go back to this guy, http://www.ticonline.com/ People would laugh at his approach because it’s almost trivial and on the surface, lacks basis from financial theory. Yet he has had a 22% compounded return and isn’t fazed by the downturnm whatsoever–I’d guess it’s because he manages a small amount of money. Call it luck, but that’s what investing is all about–hold a few stocks based on stability and competitive advantage, and a few of them might make you very rich (the 80/20 rule). Portfolio theory would tell you to rebalance after gains, which perpetrates mediocrity. They’re teaching us how to be mediocre!

That dude is awesome. Heard about him a few years back. Good for him.