Tuesday, July 31, 2007


I confess that I am one of those people who sometimes take a perverse pleasure in the misfortune of others.


The latest bunch of smart guys to have their asses handed to them are the people at Sowood Capital Management, a hedge fund started a couple of years ago by alumni of the Harvard Endowment. It was reported today that funds they run have lost 50% of its value in a month. This is getting to be a commonplace event lately but the news with Sowood is that they didn't invest in sub prime paper but in regular corporate debt.

How does such a thing happen? Major hedge funds have entire departments dedicated to risk management.

Was it a fatal combination of leverage, lack of liquidity and hubris? Was it a reliance on impenetrable mathematical black boxes that tell you the pricing relationship between different securities but that never seems to work in times of market crisis?

We'll never know. The principals at Sowood will no doubt move on and start another hedge fund with an equally impressive sounding name and raise another billion from people who are supposed to know better.


Adventures In Money Making said...

you should use this image!

after reading 'when genius failed' i'm always skeptical of extremely well-qualified risk managers.

In "the black swan", NNT plays a game whether participants give a number and a % estimate of how right they think they are. For example, I'm 98% sure that the US population is 270 million. He found that the more educated a person is in a given field, the higher the likelyhood of they're being sure & wrong. He called this "epistemial arrogance".

So, since they have risk management desks, their more likely to be wrong in their judgement!!!!!

I'm sure you've read one of his books. They're just brilliant!

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