Galleon and relative value

The New York Times writes: "One bad trade, in the shares of the chip maker Advanced Micro Devices, cost his hedge fund, the Galleon Group, $30 million. That loss more than wiped out the profits that prosecutors claim Mr. Rajaratnam and his accomplices reaped with their scheme."  I wonder if this is true.  The loss was mostly due to a decline in shares overall (in the late 2008 meltdown).  If AMD lost less than the market decline and if the fund had puts or similar to hedge out broader market moves, then couldn't they still have made money off the relative value difference?  I don't know whether those trades can work but I thought there were ways to be macro market neutral and still take advantage of price moves.

Wall Street problems

This is generally right, especially adding in my pet theory of sales guys rising a little further than they ought to.

fund management and alternatives

This week's Economist has an editorial regarding funds that says:

"A survey by Watson Wyatt, a consulting firm, found that the cost of running a pension scheme increased by around half between 2003 and 2008. That was because schemes allocated more of their portfolios to hedge funds and private-equity managers, which charge much higher fees. Chasing performance by paying higher fees might work for individual investors, but in aggregate it is doomed to fail. The return to the average investor is the market return minus costs; if costs rise, returns must fall."

I don't think this is quite right if hedge funds and private-equity managers are investing in under-represented parts of the market. In that case, although the statement "The return to the average investor is the market return minus costs" is true, it unfairly treats the "market" as being the entire market even where it is not.

LBIE and Hedge Assets

This sentence from the GLG investor letter (posted on the NYT website) is difficult to understand: "Our assessment of the LBIE exposure is based upon a number of assumptions (including, that amounts LBIE was required to treat for each Fund as client money and not use in the course of its business were and are, in fact, so held and will be released upon repayment by each Fund of all its debt to LBIE)."

I would have thought that, for the most part, repayment of debt to LBIE would effectively release securities held as collateral in margin accounts and NOT cash (because cash would be credited dollar for dollar and so is a wash - no incentive to repay).

If this thought is correct, that means that GLG and its brethren have contingent liabilities equal to (x) the excess of securities held as collateral over (y) borrowings from LBIE. Assuming they were leveraged to the hilt and a meaningful portion of assets were at LBIE and they are a general unsecured creditor of LBIE...