Why you should be financially conservative

[davebarnes]

https://www.bloomberg.com/news/arti...unts-liquidated-amid-energy-market-volatility

Wiped-Out Hedge Fund Manager Confessed His Losses on YouTube

 

[Sunset]

I heard about this situation gas vs oil, but it seemed really remote.
Seeing this fellow talk, really put a human perspective on it.
Although he is sad, I'm sure some of his clients are even more sad (desperate now?), as some had margin accounts.
So they lost not only their entire investment, but also the margin borrowed, guessing this could almost double their lost money..

 

[Vacation4us]

Anyone know how much he lost?

 

[Spock]

I read $150M.
"One client told the Journal that he had $470,000 invested in the fund. Three days later, he now owes $150,000 to its clearing firm"


others have commented on the irony of a guy telling you his bets wiped you out
while he's wearing a rolex.

 

[kgtest]

So this dude just shut down shop. Will be interesting to see, but this dude talks like he's gonna jump off a bridge or into a prison jump suit.


Rougue wave. LMAO! It's called over levereged, under-diversified to the hilt?

 

[kgtest]

Lol, naked call options on natural gas, that 'aint no rogue wave, that's just dumb (insert) gamblin'.

 

[jazz4cash]

...this dude talks like he's gonna jump off a bridge ...

I was nervous that it might end violently.

 

[marko]

I was nervous that it might end violently.

Holy crap! Sure sounds like something could go very wrong.

 

[Rianne]

Sounds like a suicide letter to say "good bye."

 

[JustCurious]

He drinks wine for breakfast?

 

[splitwdw]

I'm a sceptic. It sounds like he's trying to personalize it so his clients don't come down too hard on him. He says toward the end of the video that the office personnel (and he names each one) will answer their questions but doesn't say that he'll be available. By the way, you can't look for a "rogue wave", they are unexpected.

 

[pb4uski]

And I thought that my net worth had a bad week this week.

 

[Vacation4us]

Well hopefully only people who could afford to lose what they invested, invested with this guy. Certainly makes index funds look like a Great idea.

 

[Dtail]

That's the problem with the Hedge Funds which employ leveraged risky investments chasing Alpha.
The most successful hedge funds which we dealt with at work were the "Long/Short" strategies employing computerized trading strategies.

 

[haha]

Did he sell unhedged naked calls?

That seemed to be what he was alluding to.

Market losses can be awful, and it sounds like his might have been.

Ha

 

[braumeister]

Well hopefully only people who could afford to lose what they invested, invested with this guy.

The minimum investment was $250K so you would certainly like to think so.
They specifically targeted "high net worth investors" but looking at their website a year ago they made it sound pretty safe:

If you are a high net worth investor, preserving and growing your wealth is likely a high priority for you. You worked hard for your money. Now you feel it should be working hard for you.

But chasing maximum return and yield is hard, isn’t it? Stocks are great, until they aren’t. Getting responsibly diversified is more difficult than ever. Hedge funds can work, but you’re never really sure what they’re doing with your money. Options can be a great alternative, but most make the mistake of buying them. Stock option sellers may think they’ve found an answer, but premiums can be small, and margin requirements huge.

Most will simply give up and settle for what they get. The market will decide their fate – it goes up, they will feel good. If it goes down, they will feel bad. However, if you always felt there was a smarter way to invest and all you had to do was find it, you may finally be home.

Still, those HNW investors were asked to trust them completely:

We do not offer “self directed” accounts nor do we offer “discount” rates. There are plenty of places that offer that service if that is what you are after. What you will get here is a managed portfolio that sells deep out of the money options over a basket of meticulously researched, diversified commodities markets.

Your account is monitored and managed full time – directly by us – primarily James Cordier himself. Action is taken in the account if a new opportunity presents itself or a risk parameter is triggered. There is no action required on your part except to watch your account (if you like) and participate in a periodic progress evaluation and update. At the same time, you maintain ultimate control over your account and can direct us to start/stop or alter your trading plan at any time.

It all worked until it didn't.

 

[MarieIG]

I feel sorry for his clients.

 

[nash031]

I read $150M.
"One client told the Journal that he had $470,000 invested in the fund. Three days later, he now owes $150,000 to its clearing firm"


others have commented on the irony of a guy telling you his bets wiped you out
while he's wearing a rolex.

That was my thought. Seemed very contrite in his nice suit, leather chair, and Rolex.

 

[Elbata]

Could someone explain to me what happened? Sometimes I think I understand stuff and other times I think not so much.

I don't know how it happens, but did he lose all the money the clients' money and even more? How does that happen when he says he's diversified?

Sure makes me thankful to have learned from Mr. Bogle and Buffett.

 

[ERD50]

Could someone explain to me what happened? Sometimes I think I understand stuff and other times I think not so much.

I don't know how it happens, but did he lose all the money the clients' money and even more? How does that happen when he says he's diversified?

Sure makes me thankful to have learned from Mr. Bogle and Buffett.

He was using some sort of leveraged investment, and he bet the wrong way. Sounds like he basically took a very risky bet, and used borrowed to do it. So you end up not only losing the entire bet, but still on the hook to repay the borrowed money. Bad.

Lol, naked call options on natural gas, that 'aint no rogue wave, that's just dumb (insert) gamblin'.

Our favorite stock-picker-contest-player should tuck that 'rogue wave' comment away for his next excuse!

Yep, a "pro" should understand exactly how much risk he's taking, no way should he ever get wiped out. Had the bet gone his way, he would be bragging that he is a genius!

I recall, long ago on another investing forum, some people were fans of option trading, because used correctly, you could know exactly your maximum loss. Of course, you might have so many losses in a row that you still got hurt bad, there is no magic bullet. But this guy was just playing with fire in a gunpowder factory.

Here's an interesting title from one of his posts at Seeking Alpha:

"Option Selling Opportunities So Good They're Scary" - well, he was right about the 'scary' part!

Holy Cow - this was posted just a few weeks ago!

https://seekingalpha.com/article/4216814-option-selling-opportunities-good-scary

And:

https://www.cnbc.com/2018/11/21/a-r...awry-leads-to-weepy-youtube-confessional.html

James Cordier had piled into a risky position in natural gas derivatives without hedging to prevent steep losses, and when natural gas spiked 18 percent last week, the losses mounted.

OptionSellers sent customers an email entitled "Catastrophic Loss Event" saying that all their money was lost, and they could owe even more to another firm to cover margin calls.

Jason Albin, a lawyer in Ohio, says he has talked to several OptionSellers clients who are retirees and have lost hundreds of thousands if not millions of dollars.

Wow, and 18% change in the price of NG wiped him out!? That's some serious leverage.

-ERD50

 

[jim584672]

I heard they lost more than they put in, ouch!

This guy looks like he is going to end it all on this video.

 

[braumeister]

Very sad story.

No one answered the phone Friday at Cordier's firm in the SunTrust Financial Centre in downtown Tampa. Cordier, who lives in a bayfront Apollo Beach house he bought last year for $1.6 million, did not return a phone message.

A much deeper pocket is INTL FCStone, the brokerage that handled Cordier's option trades. It is a public company with nearly $30 billion in revenues last year.

FCStone "had duties and responsibilities to know their customer and vet advisors trading on their accounts and have risk procedures in place to prevent these things from happening,'' Albin said.

Many of Cordier's clients had qualified Individual Retirement Accounts at FCStone. Generally, money in such accounts is not supposed to be used for the risky type of trading that Cordier did on the clients' behalf.

https://www.tampabay.com/business/in-youtube-video-tampa-hedge-fund-manager-apologies-for-losing-millons-of-his-clients-money-20181123/

 

[ERD50]

After reading some more, I think I have a more detailed look as to how he blew up.

Oddly, it was actually very safe bets he was making! But it is how you go about it...

So it looks like he was selling options such that you would expect to 'win' 99 times out of 100. But of course, the 'pay off' for that kind of bet is very small (< 1%). So he tried to make 'big money' by leveraging this bet with borrowed money.

So you make 1% four times a year (options 3 months out) is 4%, but you use a 10x leverage for 40% a year. It works until it doesn't.

He apparently wasn't even diversified, and had so much in Natural Gas options, that the move in NG wiped him out and more.

The 4th post down on page 2 by srinir gives some examples.

https://www.elitetrader.com/et/thre...to-blow-up-his-fund-and-clients.327102/page-2

A $4 call sold for 1.5 cents when NG was ~ $3. If the call expires and NG is less than $4, he gets to keep his 1.5 cents. But NG went up to ~ $5, so the call that he SOLD is now worth ~ $1 ($5-the $4 call strike) - he would need to cover/buy it back at ~ 66x what he sold it for! Double-plus-OUCH!!!

The financial firm behind those options isn't going to let that go on any longer, so they liquidate him to cover as much as they can. It apparently rose too fast to catch it all, so he went negative.

What he needed was an offsetting position that would limit the maximum loss he could have. It's been a while since I studies options, but I think what he would need to do is BUY a CALL at a strike price little above the $4 strike he sold, say $4.10. Then the max loss would be 10 cents on the 1.5 cents he sold for. But of course, the $4.10 strike call will cost him only a little less than what he sold the $4 call for, so there is little profit to be made. So he went 'naked' to maximize profits. And he got hit, big time. Not only the 66x, but if he was on 10% margin, that's like 660x against you!

I'm sure those details are wrong, but it explains the concept, I think. A classic Taleb "Black Swan" story, though this Black Swan should have been expected - it just would not be that uncommon. In fact, I think Taleb does something like the opposite of this - his data says the bets that only pay off occasionally are often mis-priced, and if you make enough of them you come out head?

-ERD50

 

[michelek]

I do think he said he drank wine when he opened his laptop each morning. Wine for breakfast! Only in cuff links and that custom suit!

 

[MRG]

I do think he said he drank wine when he opened his laptop each morning. Wine for breakfast! Only in cuff links and that custom suit!

Maybe it was a late breakfast? [emoji12]