Another hedge fund on the brink

Discussion in 'Commodity Futures' started by Comanche, Dec 13, 2006.

  1. Yeah, the article where the hedge fund founder Maounis says the positions were hedged rubbed me the wrong way, Brian piled on leverage to offset that decrease in daily gain/loss in an attempt to get large gains. The other factor which I think is important is that to get the same risk exposure using piled on leverage you have to take much larger positions. That totally screwed him, because now that the other market players knew he was in trouble, he had no way to get out of his highly leveraged position.

    Say I have $11,000 in my account, I can trade a single full size NG contract or TEN contracts in a spread 5 long 5 short. With 10 contracts the liquidity is not so much a problem., but it's still 10x as many contracts to deal with .

    Now say I have $1,100,000,000 in my account. Now we have a liquidity problem in moving 1,000,000 friggin contracts trading out years away (I think Hunter did the March-April spread on 2007, 2008, 2009, 2010, 2011, and 2012, going long March and short April). If he had taken a position directly he would have 100,000 contracts to move rather than 1,000,000 contracts.

    Isn't the risk still unlimited with a spread trade, I mean spreads can go negative as they have with the 2007 March-April spread (-$0.02) that was +$2.40 earlier in the year when Hunter initiated his trade. It seems just as risky if not riskier than a straight trade since you can increase your leverage an additional five times above the leverage with a straight trade.

    Looking at the first hypothetical account, if I had gone long using all of my account equity on the march 07 contract instead of taking the march 07-april 07 spread in April 06, the loss is smaller on the straight trade (assuming I kept meeting margin calls up to this day). $2.42 loss* 50,000 on the spread versus $5 loss* 10,000 on the straight trade.
     
    #21     Dec 20, 2006
  2. Sorry, I meant March LONG April SHORT, with the thinking being that winter demand will increase and April is the first shoulder month so March will increase more than April and the spread widens with March further ahead of April than it is now?
     
    #22     Dec 20, 2006
  3. Cutten

    Cutten

    Out of interest, when did it become the fashion for traders to talk as though they were Brooklyn cab drivers?

    "Natty" = an adjective used to describe someone who dresses rather sharply.

    "Natural gas" = a gaseous substance used for energy, and the subject of your post.
     
    #23     Dec 24, 2006
  4. #24     Dec 24, 2006
  5. Cutten

    Cutten

    Haha, good point! I've just noticed that since it got in the news, every man and his dog is saying "natty" nowadays, almost like an affectation. I'm just waiting for Hilary Clinton to start talking about how she made $100k trading "natty" and then I guess I'll have to start calling it that myself ;)
     
    #25     Dec 24, 2006
  6. Ahh dear old carpet-bagging, abuse-loving, coattail-riding, hypocrite Hillary Clinton from my home state of NY.

    next thing you know she'll ban cattle futures because they exploit the underclasses of America.
     
    #26     Dec 31, 2006