Market routs always leave plenty of victims behind. A savvy -- or lucky --
few can come out ahead amid the chaos, though.
Tuesday's market plunge included one of the more renowned traders in recent
Wall Street history: John Meriwether. Mr. Meriwether formerly ran Long Term
Capital Management, the hedge fund whose collapse in 1998 nearly triggered
a global financial crisis. He now runs a $2.6 billion fund, JWM Partners,
which was up after markets closed Tuesday and has generated positive returns
for February, according to investors.
Mr. Meriwether, who was traveling and unavailable for comment, benefited from
bullish bets on the yen and Japanese equities and U.S. Treasury bonds, according
to people familiar with his results.
was Deutsche Bank's Greg Lippmann, who in recent months has made paper profits
for the bank of roughly $250 million betting against an index of subprime-mortgage
loans, which plunged more than 7% Tuesday before rebounding a bit yesterday.
Mr. Lippmann, Deutsche's asset-backed securities trading chief, has urged
his firm's clients to bet against the value of mortgage bonds underpinned
by subprime loans, as those made to borrowers with weak credit are known.
According to attendees at a September dinner, he boasted, "This trade
declined to comment yesterday.
of Messrs. Meriwether and Lippmann to stay afloat while the market was sinking
illustrates how some of the most sophisticated players have learned to take
advantage of heightened risk levels in the financial system these days. To
be sure, some of the gains and losses so far exist only on paper, and whether
they will actually materialize in the real world -- especially for trades
that aren't easy to unwind -- is an open question.
number of small investors making more-mundane stock-market bets were left
holding the bag. Hit especially hard were individuals stampeding into mutual
funds in January, especially stock funds that invest overseas.
a 42-year-old day trader in Buffalo, N.Y., initially steered clear of stocks
most of Tuesday because he didn't see any good opportunities for a quick profit.
After spending most of the day painting his son's room, he checked his eight
Dell Computer monitors and decided to buy. At 2:58 p.m., he bought 1,000 shares
of Allegheny Technologies for about $98 a share. With some other trades, he
plunked down about $150,000 of his $700,000 portfolio.
He lost $1,200 within a few seconds, as the Dow industrials suddenly plunged
about 300 points due to a glitch in computing the index. "Before I could
blink, the stock had sunk to $96, so I started selling at a loss," he
says. "It went to hell in a handbasket. It was disgusting."
And some hedge
funds -- private partnerships that cater to wealthy investors and large institutions
-- that focused largely on stocks were pinched as well. Many individuals and
hedge funds have been using heightened levels of borrowed money to
amplify returns, and that left them exposed on bad bets when stocks dived.
equities and volatility the damage was much sharper and faster, with the bulk
of the move we saw in May last year delivered in a single day," noted
Goldman Sachs Group economists Dominic Wilson and David Heacock.
prices rebounded a bit from Tuesday's 416-point decline, with the Dow Jones
Industrial Average rising 52.39 points to 12268.63. But the recent action
highlights how some of the market's heavyweights have profited from the sudden
pullback in various markets world-wide that have been marked by excesses.
Financial markets for some time have been awash in cash, leading to
huge amounts of cheap financing. And market players have benefited from buying
riskier securities around the world and letting them ride. The question is
whether Tuesday's plunge could begin to change that scenario.
macro fund -- which like other macro funds has a no-limits investment strategy
that can make for volatile performance -- profited from having bought Japanese
yen, which rose Tuesday as investors sought the currency to unwind so-called
carry trades. In these transactions, investors buy a currency whose central
bank pays low interest -- in this case, Japan's yen -- to invest the money
in places with higher yields.
JWM held lots of U.S. Treasury bonds, whose reputation as one of the safest
places to park money drew buyers fleeing riskier assets Tuesday. The firm
had also bet against riskier issues of corporate bonds.
other hedge funds pursuing the same strategies, Mr. Meriwether has done well.
Last year, his macro fund generated returns of 7.5%, down from 25%
in 2005. The Macro Index compiled by Hedge Fund Research Inc. of Chicago was
up 5.61% in 2006 and 6.67% in 2005.
Bank's Mr. Lippmann, 38, promoted his winning bet at a September dinner with
several dozen top hedge-fund clients in a private dining room at the Palm
restaurant in New York. At the gathering, Mr. Lippmann strongly argued that
the value of mortgage bonds underpinned by loans to borrowers with weak credit
would begin to fall. Some in the room had already lost money trying to predict
a softening in the housing market, and they were skeptical that Mr. Lippmann's
timing was right, attendees say.
Mr. Lippmann's bet became even more profitable when the ABX index,
which reflects the value of such risky mortgages, fell 7.4% on top of a 30%
decline since the beginning of the year. Yesterday, the ABX index rebounded,
rising roughly 3%.
The ABX index
tracks how much it costs to insure a group of BBB-minus-rated bonds based
on subprime mortgages. The index is a derivative that falls in value when
the cost of insurance rises, so it is seen as a proxy for the value of the
underlying bonds. The position Mr. Lippmann was promoting involved betting
that the cost of insuring such bonds would rise, causing the index to fall
The same bearish
bet championed by Mr. Lippmann at Deutsche was widely popular among hedge
funds, analysts say. "The [ABX] market appears to have been in control
of [bearish investors] for some time now," says Peter DiMartino, an asset-backed
securities strategist at RBS Greenwich Capital in Connecticut. "Folks
who historically would have [made bullish bets on the index] have been hesitant
to step in, which has made it an even more illiquid market."
Of course, Mr.
Lippmann and hedge funds could lose big if the index rebounds strongly, given
how the illiquidity makes it difficult to buy and sell in this burgeoning
market. Says Loren Katzovitz of fund firm Guggenheim Advisors: "I've
spoken to over 40 hedge-fund managers in my world, and the trade is in
For more than
a year, hedge-fund manager Evan Claar's caution weighed on his portfolio.
Mr. Claar, who runs New York hedge fund Crossway Partners, keeps about one-third
of the firm's money in short positions -- or bets that stock prices will fall
-- and another third in restructurings and other investments that tend to
be uncorrelated to the market. His fund gained almost 18% last year, but could
have done even better with fewer short positions.
the strategy paid off, though. As the market tumbled, Mr. Claar's positions
rose in value, helping the fund maintain its gains for the year. Yesterday,
Mr. Claar did a bit more selling, he says.
our short positions were painful" because the shares he held kept going
up, he says. But on Tuesday, "we were vindicated for maintaining our
short exposure, and it shows how important it is to always stay hedged."
Mr. Claar says
technology stocks remain overvalued, citing excess inventories, and
he has worries about the subprime-mortgage sector. But he is more bullish
on the overall U.S economy.
Mr. Clark, the
Buffalo day trader, managed to recover half his losses before the markets
closed Tuesday. And amid yesterday's rebound, he managed to generate gains
of $700 trading a tiny technology stock. But the week's action has left him
shaken. "It doesn't inspire confidence," he says. "I can control
my own trading plan -- but I can't control what the market does."
We've got a huge number of upgrades to do, so let's do them all at the same
technical administrator at a large medical group in Canada. Among other things,
Im responsible for the LAN, the WAN, all the desktops, laptops, peripherals,
and a medical-records application thats at the core of our groups
operations. Over the last couple of years, weve been struggling to make
that app perform more reliably. At the same time, our infrastructure has been
growing fast, and sluggish performance from our overloaded servers had become
quite a wish list:
* A two-generation
upgrade of the medical records application an app thats critical
to the health and well-being of our patients;
* A two-generation upgrade of our revenue-critical Practice Management application;
* Moving our datacenter from an overcrowded, in-house facility to a third-party
* Installing bigger, faster servers for in-house use;
* Upgrading our connectivity software from RDC/Terminal Server to Citrix ICA;
* Deploying server virtualization and SAN (storage area network) technology;
* Upgrading Windows Server, SQL Server, and triCerat (software that supports
printing across the WAN);
* Buying new scanning software to interface with the upgraded medical records
OK, there were
issues. Our CIO had no experience with Citrix ICA
or server virtualization
or SANs. But we figured if we moved through this process one step at
a time, everything would be fine.
Then, in the
infinite wisdom of the powers on high, our CIO got approval to make all these
changes simultaneously, during a one-week roll-out! I warned the CIO that
the proverbial snowball in hell would have a better chance of success than
this ill-advised rush to disaster. But he assured me that his staff would
be able to handle any problems.
started on Friday evening. By Saturday morning we were crippled. The only
functional apps were an old Exchange server and the staff time-clock software
running on the old server. The CIO and his staff of help-desk technicians
had reserved Sunday for testing. But nothing was working, and the level of
chaos was so intense nobody knew what to test first.
computer science student would have known that a more incremental, staged
transition would have had a better chance of success. For much of the week
the transition team threw money at Microsoft, Citrix, our medical-records
application vendor, an IT consulting group, and the new datacenter hosting
company, trying to isolate, identify, and repair the vast number of issues
that had arisen. The CIO spent the week hiding from a small army of inside
staffers and outside consultants, all of whom were waiting in line to call
him bad names.
By 5 p.m. Thursday
things were beginning to work, and by mid-day Friday I was reasonably confident
that we were able to care for our patients. I had been worried that a patient
might die because of the deranged state of our systems. But we got lucky,
and no one suffered physical harm. On the other hand, my best guess is that
during the course of this week we spent roughly twice the half-million dollars
that had been allocated for the upgrade.
To my surprise,
the CIO hasnt been fired. Maybe thats because HR (Human Resources)
cant find his records.