Saturday, September 30, 2006


And the Dumb and Dumber award for this month goes to---drum roll, please--investors in the hedge funds, Amaranth and Pirate! Leaves weren't the only thing falling the past couple weeks. Two headline hedge fund meltdowns in one month--how much more fun can we stand!

Let's start with Amaranth. We all know that there in usually no hedge in most hedge funds, but Amaranth takes the cake for tight rope walking buck naked and with no net. Amaranth had over half its $9.6 billion in assets on one bet, namely that natural gas prices would be much higher as winter season approached. Amaranth went "all in", betting that the price differences on gas futures for the summer and winter months would get larger over time. Afterall, it happened in 04 and 05, so why not bet the house, the furnishings, the college funds and the kids that it would happen again this year. WRONG! The fund ended September with 70% of its assets transferred to all those making the opposite and correct bet. Amaranth supposedly means "never fading" in Greek. I guess it's better to flame out than fade away, to paraphrase Neil Young.

But stop and think about it...Amaranth laid almost $5 billion US dollars into the hands of a 32 year old guy working 2500 miles away from Amaranth's Green Witch headquarters in an oversized closet in Calgary, Alberta, jammed with computers and empy cans of Red Bull. And the jockey was going to bet it all in what is probably the most volatile market there is, natural gas. What the fuck were they thinking? Where was the adult supervision? Sure, the guy had made over $2 bil year to date, but the way he made it was two giant steps forward, one giant step backward, up double digits 2 months, down double digits the third month. So much for the Sharpe ratio.

Last week, the founder of Amaranth, Nick Maonis, set the financial world a'chuckling when he told investors on a conference call that he had "every intention" of staying in biz. Yeah, right. Like his posse of traders were going to hang around when the ship was 20,000 leagues under its high water mark and whatever investment they had in the firm was basically zilch. Traders know when to close a loser position.

And speaking of ships, what about Pirate Capital? The firm is being investigated by the SEC on suspicions that the fund failed to alert the commission when it was selling stock. Pirate has already had pretty much a puke ass year, being up less than 3%, or just a little more than what my money market fund has delivered. And this is what all the blood, sweat and tears of "activist investing" gets you?

The fund was founded by a Mr. Tom Hudson. Before starting his hedge fund in 2002, Hudson was a distressed debt trader at Goldman Sachs. He was fired by the firm for some hanky panky with a co-worker. In this day and age, doesn't even the dimmest dim wit know that you don't dip your pen in the company ink? Doesn't that incident suggest that the guy might have an issue about following rules, that he ain't the poster boy for discretion? But that didn't keep him from ramping his fund up from $2mm in 2002 to $1.2 bil today. You would think that a fund-of-funds guy would say to himself, "I can put a few million with this kid, who evidently has trouble keeping his rocket in his pocket, or I could pass and keep looking at the hundred other hedgie wannabes lined up outside my door, begging for some change...maybe I should take a pass on the guy. Something about him naming his fund 'Pirate' gives me the willies." Evidently, a lot of FOF guys, advisors and consultants thought differently, being suckers for the Goldman Sachs stamp, besmirched or not.

I use to work with a woman who covered Pirate. More than once I saw her blushing after talking to Hudson on the phone. "Can you believe this guy is coming on to me," she said once. "He said I have a sexy voice and asked me what I looked like." What does it tell you about the guy that after the sex affair at Goldman, he adopts as his company logo, "Surrender the booty!" A bit mocking, don't you think. Why should it suprise anyone that he gets in trouble with the SEC?

Pirate, as it name indicates, take pride in pillage and plunder tactics when it takes an activist role investing in a company. A magazine aricle reported that a 27 year old analyst for the firm, Zachery George, told the CEO of a company that the fund was investing in that "You work for us now." He went on to add that Mr. George and Pirate wanted the company sold and the CEO sacked. "Next year we're going to be here, and you won't," he said. Isn't that the kind of snotty-nosed hedge fund punk that you'd like to back hand bitch slap?

Hudson likes to use cutesy terms like "shipwrecks" and "treasures" in his investor letters. I wonder why he didn't use the word "mutiny" in his last letter when he described how half his staff walked out on him or was fired last week. Among those fired was the above-mentioned young Master George.

I'm sure Mr. Manois and Mr. Hudson have above-average IQ's. They won't be the first smart guys that ego and hubris turned into dummies. But the real nincompoops are the investors and their advisors who seem to be blind when it comes to their hedge fund investments. They allow these funds to keep them in the dark about their strategies and tactics. They don't raise questions when they see extreme volatility in their returns or question the extra risk that stupendous monthly gains, like those that Amaranth posted, must certainly entail. I have a hard time feeling sorry for the San Diego Retirement Fund, which lost over half the $175 million that it had invested in Amaranth. I can imagine the CEO of that fund made up for his middling government pay by bragging to his friends and neighbors about all his cool hedge fund investments. Guys like that can prove they have a couple of ounces of brain matter by doing two things: First, wake up to the scam that hedge funds are perpetrating on them; and second shoot the consultant/advisor/FOF parasites who failed to protect them from jokers like those discussed above.

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