Refco mess

[brewer12345]

Not sure if any of you have been following this disaster, but I suspect that a lot of today's volatility is related to Refco freezing a whole slew of offshore customer brokerage accounts. These are almost certainly hedge fund accounts loaded with high volatility equities, junk bonds and futures positions (which are probably leveraged). Imaginde sitting on a pile of these types of assets and being told you couldn't do anything for 15 days because the broker is in financial difficulty! Not fun. As a result, the guys whose accounts are affected are madly trying to offset positions and possibly raise cash by buying and selling in other accounts, and I suspect that a lot of them are trying to do it at the same time.

If the Refco mess gets worse, we could see a contagion spread beyond the affected hedge funds. For example, all of the big money center banks have beaucoup exposure to hedge funds. Remember LTCM? We aren't anywhere near that, but we are definately several steps closer than we were a week ago.

 

[JPatrick]

This too shall pass...(unless your money is caught in the mess)
One more indicator we are getting closer to a bottom.

 

[brewer12345]

Yeah, it probably will, but its not the sort of thing that gives me warm fuzzy feelings. I am hoping that a few selected things crash, either so I can cover or buy some up.

 

[Nords]

Yeah, it probably will, but its not the sort of thing that gives me warm fuzzy feelings.  I am hoping that a few selected things crash, either so I can cover or buy some up.

REFCO's shares were halted today. I was going to pile on but I'm glad I didn't get around to it.

No sense in being greedy. How 'bout that FED & RGC?!?

 

[Mr._johngalt]

junk bonds and futures positions (which are probably leveraged).  Imaginde sitting on a pile of these types of assets and being told you couldn't do anything for 15 days because the broker is in financial difficulty! 

I bought my "junk" knowing the downside
and also that I might need to hold it forever. As long as the checks keep coming I'm okay. I will allow that being informed my broker was
insolvent would cause some angst.

JG

 

[brewer12345]

I bought my "junk" knowing the downside
and also that I might need to hold it forever.  As long as the checks keep coming I'm okay.  I will allow that being informed my broker was
insolvent would cause some angst.

JG

JG, you have a very different outlook than a hedge fund manager. You are happy to hold until doomsday, come what may. In contrast, a hedge fund manager only gets paid if they are up by the end of the year, regardless of what the overall markets do. If he is down (even for just one year), he may very well see his whole business come apart at the seams as assets and employees flee for greener pastures.

 

[justin]

JG, you have a very different outlook than a hedge fund manager. You are happy to hold until doomsday, come what may. In contrast, a hedge fund manager only gets paid if they are up by the end of the year, regardless of what the overall markets do. If he is down (even for just one year), he may very well see his whole business come apart at the seams as assets and employees flee for greener pastures.

I thought hedge fund managers got paid whether they were up or down (huge expense ratios), and then they get massive profit sharing bonuses if they happen to be up.

 

[brewer12345]

I thought hedge fund managers got paid whether they were up or down (huge expense ratios), and then they get massive profit sharing bonuses if they happen to be up. 

Usual structure is "1 and 20". That is, 1% of assets and 20% of the gains at the yearly mark. You can run the place and make payroll on the 1%, but that's usually about it. The staff is usually made up of very talented researchers and traders who cost a lot. If they don't believe that a big bonus is in the works, they often defect pretty quickly.

 

[Gone4Good]

Usual structure is "1 and 20".  That is, 1% of assets and 20% of the gains at the yearly mark.  You can run the place and make payroll on the 1%, but that's usually about it.  The staff is usually made up of very talented researchers and traders who cost a lot.  If they don't believe that a big bonus is in the works, they often defect pretty quickly.

I can vouch for this. 2%-2.5% expense ratios aren't uncommon but the real cash is found in the 20% participation. 2% on a $1B portfolio may sound like a lot of cash but after you start paying for your back office, legal, and personnel expenses it goes quickly. A "name brand" trader can easily cost $5 MM per year, and an experienced analyst can run over $1 MM. Now typically these people don't get paid unless the fund hits its performance goals, but most experienced guys won't walk into a new place without some form of guaranteed minimum which could include a multi-year lock-up.

 

[Marshac]

Slate