Hedge-Fund Guy Atones for His Subprime Bond Sins: Mark Gilbert
2007-08-15 19:34 (New York)


Commentary by Mark Gilbert
Aug. 16 (Bloomberg) -- Dear investor, we'd like to take this
opportunity to update you on the recent performance of our hedge
fund, Short-Term Capital Mismanagement LLP.
As you know, market selection for the entire fund is guided
by a proprietary investing tool we like to call ``a dartboard.''
Once the asset classes are decided, individual security
selections are generated by digitizing our unique hexagonal
cuboid models.
Unfortunately, it transpires that our hexagonal cuboids are
not as unique as we thought. Hundreds of other hedge funds
possess identical dice. The technical term for this is a
``crowded trade.'' You may also see it referred to as ``climbing
on a bandwagon already headed for the wall.''
As our alpha generation collapses, our beta has turned
negative, our delta hedging has gone toxic and, trust me, you do
not want to hear about our gamma. We can't even find our epsilons
in the dark with both hands.
You will appreciate that accurate pricing is essential for
evaluating our investment strategies. This has proven to be
extremely challenging in recent days. Previously, we have relied
on Bob, the sales guy at Hokey-Cokey Bank. Bob assured us the
securities were still worth 100 percent of face value, so
everything was cool. Bob sold the collateralized debt obligations
to us in the first place, so he knows what he's talking about.
Bob, however, appears to have had a nervous breakdown,
judging by the maniacal laughter that greeted our requests for
price verification this week. Our efforts to implement an in-
house CDO valuation framework, using a technique the ancients
knew as ``making things up,'' proved unsatisfactory.

Where's the Bid?

Currently, all of the portfolios we manage are undergoing a
rigorous screening known as ``crossing our fingers and praying
that we don't have to try and find a bid in the market.'' This is
supplemented by a cross-market statistical analysis originally
developed by the U.S. military called ``don't ask, don't tell.''
This ``unmarking-to-unmarket'' procedure has been the benchmark
for the hedge-fund industry for the past, ooh, 72 hours.
We have, of course, been in touch with the rating companies
to update our default-probability scenarios, particularly on the
AAA rated investments we own. They recommended a forecasting
method using stochastics to regress the drift-to-downgrade
timescales for the past 100 years and throw them forward for the
next five minutes. The technical term for this is ``induction,''
though those of you of a less quantitative bent may know it as
``guessing.''

AAA or Toast?

We are pleased to report that, contrary to what current
market prices might suggest, all of our top-rated securities
remain absolutely AAA. Provided, that is, the future performance
of the underlying collateral is identical to its history.
Otherwise, the rating companies say our investments are likely to
be reclassified as ``toast.''
We have also been checking our back-up credit lines with our
friends in the investment-banking world. As soon as they return
our calls, we'll be able to update you on our emergency liquidity
position. We are sure they are fine.
Some of you have written to us asking for your money back,
citing clauses in the fund documentation called redemption
rights. Frankly, we never expected you to actually read that
prospectus, which came prepackaged when we bought the Microsoft
Hedge-Fund Guy software. We certainly have no idea what all those
long words mean.
We have filed your letters in a special drawer in the filing
cabinet marked ``trash'' for now. Do you have any idea how much
trouble you all would be in if we actually sold this stuff in the
market today? At these crazy prices? Fuhgeddaboudit. You'll thank
us later.

Not a Rescue

Speaking of crazy prices, we know you'll be thrilled to
learn that we've invited a bunch of our rich pals into the fund
to participate in this once-in-a-lifetime opportunity. But this
is not a rescue. Do not even think the word rescue. This is an
opportunity. Not a rescue. An opportunity.
In fact, we think this is such a fantastic opportunity,
we've agreed to forgo our usual management fee, and we'll only
take half our usual slice of the profits. Provided there are any
profits to slice. You, of course, are absolutely invited to
participate in this offer by sending us yet more of your money on
exactly the same revised terms as our rich pals.
Finally, a word for all of you who have been kind enough to
inquire about my personal financial situation. I am relieved to
report that my directors and officers insurance is fully paid up.
Furthermore, my Bentley Continental was paid out of the 2 percent
fee we levied when you wrote your first check to us, so I will
still be able to trundle into the parking lot each morning in an
open-necked shirt to ignore your telephone calls and e-mails.
Yours, Hedge-Fund Guy.

(Mark Gilbert is a Bloomberg News columnist. The opinions
expressed are his own. Click on {LETT <GO>} to comment on this
column and write a letter to the editor.)