Thread: Justifying Hedge Fund, Goldman Butchers Greek's Again

In Justifying Hedge Fund Groupthink, Goldman Butchers The Greeks (Again)

by Tyler Durden
01/16/2011 13:51 -0500

It was just under a year ago that we first learned that Greece had been cleverly scheming to fool the EU, EuroStat, and investors, foreign and domestic, about the true nature of its fiscal deficit courtesy of various currency swaps constructed by none other than Goldman Sachs: a process which would end up being the first time the "Greeks" were butchered by Goldman. The whole purpose of Goldman's innovative "revenue scheme" was to allow the Greek government to skirt the 3% fiscal deficit limit imposed by the EU on peripheral countries, in essence making Greece appear far stronger for years than it really was. It is this deceit that laid the seeds for the current Eurozone insolvency which requires a virtually daily bailout. Amusingly, yesterday we also learned that it was the US Federal Reserve which knew about this willfully fraudulent misrepresentation as long ago as March 2005, as disclosed in the most recent Fed minutes: "CHAIRMAN GREENSPAN. Can we borrow from the Greeks? [Laughter] MR. KOS. It’s interesting, since they are at about double the 3 percent limit. So the markets are not punishing anybody for not complying." Of course, nobody is laughing now that the markets are certainly punishing those for not complying with a vengeance. Had the Fed brought attention to this, the outcome for the now doomed Eurozone and the EUR would have been different. Now it's too late. And in this vein, on Friday it was once again Goldman which put the last nail in the coffin of the "Greeks" only this time not so much the insolvent nation, as the much-suffering letters α and β. The reason for this is that also on Friday, the WSJ ran a great article which basically blasted hedge fund groupthink, confirming that the only so-called strategies that work now are those that copycat the whale asset managers (courtesy of much delayed 13F/G filings). David Kostin, fearing that his groupthink-promoting authority is being challenged (not to mention his recent promotion to partner at Goldman), immediately came to the rescue of the hedge fund hotel habituals, in essence saying that beta is really alpha, and only fools don't do what the big boys are doing. In traditional Goldman fashion, ruin follows about 5 years later to all who follow the firm's advice (long after the commissions have been converted to gold stores in various non-extradition countries). This time we are confident the event horizon will be far shorter.

First a quick look at the key WSJ observation:

Hedge funds are crowding into more of the same trades these days, amplifying market swings during crises and unnerving investors. Such trading has stoked market jitters in recent months and helped to diminish the impact of corporate fundamentals on stock-market movements. Droves of small investors have reacted by pulling money from the market, questioning its stability and whether fast-moving traders are distorting prices.

The pack behavior undermines the image of hedge-fund chiefs as savvy money managers who sniff out investment opportunities that others don't see—thereby justifying the hefty fees they charge clients. It also suggests that hedge funds are having a harder time coming up with money-making ideas in rocky markets.

One explanation is that they are focusing increasingly on the same stocks. Last year, for example, stock in Apple Inc. was held by 55 of the nearly 200 large hedge funds tracked by AlphaClone LLC. In 2008, by comparison, the favorite hedge-fund stock, Microsoft Corp., was held by 34 funds.

"The whole hedge-fund industry is a series of crowded trades," says Mr. Lo.

Of course, this all works miracles on the way up, when the pleasant melt up is first created by the big whales, those located the closest to zero cost of debt financing, then the slower and dumber pilot fish, then finally the retail lemmings. And when everyone rushes to the exit you get a May 6 event.

It has gotten so bad that even traditional venues such as Value Investing Club (not to be confused with the irrelevant "Congress") where prominent hedge fund manager pseudonyms and their proxies would talk their positions as soon as established, see little participation commentary any more:

Mr. Loeb, once a proponent of exchanging ideas, has changed his tune. "We will no longer discuss investments made prior to our public" filings, Mr. Loeb wrote in a June 2010 client letter. "We have found that discussing our ideas may result in 'piling on' by other hedge funds who may subsequently sell at inopportune times resulting in greater hedge fund concentration and volatility." Mr. Loeb, whose main fund gained 34% last year, declined to comment.

One area where the groupthink phenomenon is very hot and heavy is in the quant world where pustular 19 year old math PhDs seek safety in numbers to validate that their only trading gimmick, be it regression to the mean or momentum chasing, is viable for another few milliseconds.

SEC examiners in recent months also have questioned "quantitative" traders, who rely on computer models, about any information they're passing to each other and how, say people familiar with the matter. The SEC declined to comment.

Yet it is precisely this focus on the woefully stupid approach of trading on others' coattails that has gotten the green light for a response from the very big boys: in this case Goldman Sachs, and its key voodoo chartist: David Kostin.

We recommend investors use our hedge fund holdings baskets to generate alpha during “risk-onâ€

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