Hoisted from Comments: Amaranth and Blackstone

Crank writes:

Brad DeLong's Semi-Daily Journal: What's the Most Important Thing in Finance?: Talk about character:

After a huge one-month energy gain earlier this year, investment-advisory firm Blackstone Group sent representatives to Mr. Hunter's Calgary offices to discuss his trading, a person familiar with the matter said. What they learned made them nervous, this person said, so Blackstone pulled all its clients' money out.

It takes quite a bit to suggest pulling out because of a huge gain.

And Ian Whitchurch replies:

To steal a line out of Iain M. Banks... that's what separates the sophisticates from the simians.

My respect for Ian Whitchurch, and for Blackstone, is at a high point. Everyone else seems to have gone to New York after a big loss, and been soothed by Nick Maounis, who told them that the situation was under control, that risk had already been reduced, and that risk-management protocols were--despite appearances--sound and in place.

Blackstone sent people to Calgary after a big gain, and what they learned them caused them and their clients to flee in haste in the middle of the night.

A general rule: if you have to pay a stiff fee to get out of an investment, that makes it more and not less important to act on your belief that you should be out of this investment

Comments

[wcw]

There is nothing that makes me more nervous than making a lot of money in a position. Nothing except making a lot of money in a way totally at variance with my investment thesis. That really freaks me out.

I remember very early in my career working for a man (cough, a recent minor-party vice-presidential candidate, cough) who was making a lot of money for his clients. I presented him with the usual braindead-but-better-than-nothing realized return-vs-volatility chart. His returns were great, but volatility greater. This displeased him, since it suggested to his clients that he was taking undue risks, a conclusion he disputed. Volatility only mattered, he said, on the way down. On the way up, it was a good thing.

The end of this story is an exercise for the reader.

[Ian Whitchurch]

The question 'Am I lucky or am I good ?' - and it's close cousin 'Are those I hired to turn my money into more money lucky, or are they good ?' is a really, really tough one to answer dispassionately.

It takes a lot of character to stand against the market, but it takes more to admit that winning bets were lucky rather than good, and to change your strategy despite the fact you are ahead.

Ian Whitchurch
Northern Territory Oil
www.ntoil.com.au

[Ken Muldrew]

I wonder if the Blackstone guys passed the old Bre-X building on the way to see Hunter. For quite a while you could still see the outline of the letters near the top of the building.

[wkwillis]

Blackstone was sensible. If you don't know what's going on, what are you doing there in the first place, anyway? If you can't spot the net loser in the poker game, you are the net loser.
That's what makes me so paranoid about all those people buying tbonds as our balance of payments tanks. What do they think they know that I don't?
Keynes had some snarky things to say about the people buying French Francs in 1919. Something about charwomen and central bankers.