Blow-ups defined

NakedShorts been thinking for some while of a diatribe on the propensity of the mainstream meejuh to indiscriminately apply the phrase ‘blow-up’ – or some of its functional equivalents – to hedge fund closures that that aren’t particularly expensive to investors. But Alpha Male almost saved me the trouble:

A gaggle of media pundits has reported recently on the “hedge fund bubble” and have drawn an implicit comparison to other bubbles – of the Internet, real estate, or tulip bulb varieties. But flat performance, accounting irregularities & compliance issues are idiosyncratic risks found in any industry. They cannot be held up as evidence against an entire industry or business model.

Let’s reserve the “bubble” and “blow-up” language for, say, actual bubbles and blow-ups.

Filled. How to tell the difference? My personal favorite is to see whether the name of the fund or its manager becomes a verb, as in “I had 10,000 CME puts, but ended up getting [Victor] niederhoffered” or “Did you get motherrocked?” Several more things:

• Blow-ups are a function of both time and losses. UTEK’s ShareSleuth.com-induced 40 percent pratfall on Thursday, Oct. 24 was a blow-up because that loss, in that timeframe, qualifies. Achieving the same peak-to-valley result over several months or years as, to pick a name, John W. Henry & Co has done several times in its history, does not.
  
  Most recently, Amaranth and MotherRock were unquestionably blow-ups; Archeus and Narragansett (down 2 percent through Aug. 31 before manager Joseph L. Dowling sent investors’ money back) unquestionably weren’t.
• Material fraud qualifies. Alpha Male, a Canadian who is obviously close to the hedge fund business but chooses not to identify himself (while leaving some fairly blatant clues that I can’t be bothered deciphering), blows this one.
  
  To this list of false “blow ups”, I might also add Canada’s Portus Alternative Asset Management - the biggest hedge fund “blow-up” in Canadian history.  For all its exorbitant costs and lapses in sales compliance, investors will still get back 85% of their initial investment.
  
  What he doesn’t say is that at least some of that investor recovery is coming out of the pockets of the allegedly reputable brokers who, while feasting on extraordinary commissions, shamelessly stuffed Portus’s paradigm into the portfolios of widows and orphans. The conscience implant came right after they realized that between the regulators and furious, lawyered-up investors, this was one that would end badly.

Bubble, bubble, hedge funds in trouble
by Alpha Male
All About Alpha Nov. 1 2006
(Tug o’ the forelock to Opalesque.com)