Jim Rogers Predicts the Implosion of "Lots" of Hedge Funds: Traders Beware

Discussion in 'Wall St. News' started by ByLoSellHi, Feb 6, 2007.

  1. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ak7I420muT1k

    Rogers Says More Funds May Collapse After Amaranth (Update1)

    By Madelene Pearson

    Feb. 5 (Bloomberg)
    -- Jim Rogers, who predicted the start of the commodities rally in 1999, said more hedge funds may collapse after the demise of Amaranth Advisors LLC and losses by metals-trading hedge fund Red Kite Management Ltd.

    ``There are lots of hedge funds that are going to be in trouble,'' Rogers told journalists at a briefing in Sydney today. He didn't know which funds may be affected or when. ``We're going to see many, many more explosions.'' Rogers also forecast a shakeout amongst some private equity groups.

    Amaranth collapsed in September after losing a record $6.6 billion because of wrong-way bets on natural gas prices. Red Kite Metals, part of a $1 billion hedge fund run by RK Capital Management LLP, lost about 30 percent in January as metals prices tumbled, two investors in the fund said today.

    ``I don't know who has got what positions and in what, but I know when some of them start blowing up, it's going to have huge ramifications,'' Rogers said. ``When Amaranth blew up, it drove natural gas down to absurd prices and it was a spectacular buying opportunity for those that were still solvent and had their wits about them.''

    Rogers, 64, created a series of commodities indexes and last month predicted oil will rise to $100 a barrel. He's in Australia briefing clients of UBS AG. The Rogers International Commodity Index, which more than doubled in the past five years, has dropped 11 percent in the past six months. Copper has declined 39 percent since rising to a record on May 11 last year, and oil is down 25 percent since its July 14 record of $78.40 a barrel.

    `Too High'

    Global offers by buyout firms rose to $730 billion last year, according to Bloomberg data, almost triple the amount announced in 2005.

    ``There's too much money and they are paying too high prices and leveraging themselves too much,'' Rogers said. ``There's going to be a gigantic shakeout when that whole mess starts coming apart. This has to end badly.''

    Amaranth Advisors returned more than half of its remaining capital to investors in the fourth quarter as it sold off assets, founder Nicholas Maounis told clients in a Jan. 9 letter.

    Red Kite's troubles came after a 9.4 percent decline in copper last month, said an investor who declined to be identified because details of the fund's performance are confidential. David Lilley, a London-based partner who on Jan. 20 said he was bullish on copper, would neither confirm nor deny the loss in an e-mail today.

    Hedge funds are largely unregistered pools of capital that let managers participate substantially in gains on investments. Hedge funds globally control more than $1.3 trillion, more than double the figure five years ago, according to Hedge Fund Research Inc. in Chicago.

    Rogers, chairman of Beeland Interests Inc., traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.'' He said he had no money invested with hedge funds.

    To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net ;
    Last Updated: February 5, 2007 12:05 EST
  2. Mvic


    He is right in that both fear and greed make it probable.

    Fear of not making the return required to keep money coming in (or at least not leaving) will push managers in to riskier positions (and to me examples of this are everywhere). Greed of making huge bets with OPM ala amaranth (or hail mary trades to save the fund as amaranth appears to suggest) is also another factor that will push riskier behavior. And ofcourse as asset prices increase across with more heggie money chasing returns risk automatically increases for lower reward.

    My guess based on the history of those things is that we will get a year when we see several amaranths and money will come flooding out of the hedgies as people lose their faith in them and their cowboy managers (at least 50% fall in to this category from what I have seen). Should be great for those who have a long term track record of managing money with decent returns and low risk (in other words a fund that actually DOES hedge its exposure to risk), like this guy http://www.hussmanfunds.com/
  3. Excellent Commentary

    Exactly...the lowest volatility...commensurate with the greatest relative returns...with the most understandable risks...will attract the money....

    In the beginning...hedge funds that were equity based that could go both ways....made a lot of sense...and still make a lot of sense...

    Why should one only be allowed to go long...this is like fighting with one arm...

    And why shouldn't public mutual funds be allowed to go both ways ?


    The prudence of hedge funds was lost when excessive leverage...and excessive risks were allowed....

    Certainly not all hedge funds are run by vaqueros....and to be able to fight with both hands...only makes sense with industry standard margins...etc...

    Some hedge funds are nothing more than 1 to 3% down on a singular asset group....A very risky game...
  4. ktm


    ...really going out on a limb there calling for more fund blowups given that something like 15% of all funds go out of business every year. With 9,000 funds, that's 1350 funds shutting doors this year - if three or four make the papers then by golly ole Jim was right again!!!!
  5. I think it's an express statement in the article that he believes large funds will go down and that it will have a deep, negative impact on the broad markets:

    '..."it's going to have huge ramifications,'' Rogers said.'
  6. Excellent Commentary

    The 2%...20% typical payouts are a lot of money....

    when a big hit is made.....

    In many cases...it is just taking a shot with somebody elses money...
  7. zdreg


    there are people on ET who are jealous of jim rogers because of his financial success, his fame and his young wife, more importantly they are jealous because of his financial acumen and his patience to wait till his positions work out.

    as a result people like yourself have to post to correct the negatives responses of other ET members.
  8. NTB


    There will be huge blow-ups when the equity market feels stress. The hedge fund industry is riding the long equity trade both explicitly and implicitely. Until then, there will be some blow-ups but not systemically and in isolated cases.

    Hedge Fund managers are supposed to swing the bat because they have been hired by investors to do so. Presumably, they are more knowledgable and more competant to do that than other 'regular' investors and that is what people are willing to pay 2/20 for. If you cut the balls off the hedge fund managers (which has been increasingly done), you lose the value that the talent brings to the equation. If you don't think the manager is more talented or competant to swing the bat than you, that manager should not be hired. If you hire a manager to make bets for you, they are "bets". In some cases, those bets fail and people lose money. Investors want something that cannot be achieved by mere mortals-outsized performance in a riskless manner. Hedge Funds are not money market funds. People agree that they are risky investments, but can't accept when that risk comes to fruition.
  9. Mvic


    After reading this I think you have to agree that the risks that they are taking are unprecedented and the return is too.

  10. zdreg


    is there anyway to predict when stress in the market will create huge systemic blowups? who will benefit? who will suffer?
    #10     Feb 7, 2007