market folly

As I've detailed here and here, July was a rough month for hedge funds... or anyone for that matter. Just as commodities were responsible for handsome gains in the first half of the year, they came back to bite many a fund in the collective ass. Yesterday, we got word after market close that the Ospraie Fund was set to close after posting a 13% loss in the month of July. And, August was even worse, where they lost 26.7%. Year to date, they were down 38%. Needless to say, it's easy to see why they had to close up shop.

The Ospraie Fund, overseen by Dwight Anderson, was seeing 18% annual returns from 1999 to 2006. And, it only took a few major mis-steps in commodities to make it all come crashing down. This just goes to show that everyone is vulnerable to the volatility and crazyness we've seen in the markets this year. All it takes is one big mistake and your established track record goes flying out the window (even if it was only 5 years worth). Anderson is notable because he spent time at both Julian Robertson's Tiger Management and Paul Tudor Jones' Tudor Investment Corp before starting Ospraie. As I wrote about here, his old employer Tudor Investment Corp has steered clear of disaster thus far. Scoreboard: Master 1, Apprentice 0. This just goes to show that despite working for and learning from some of the best in the business, everyone is human and everyone makes mistakes. And, in this case, big mistakes. These days, it seems as if hedge funds are so obsessed with short-term outperformance that they will do anything to succeed. "Jack up leverage, throw risk management out the window, do whatever it takes." Maybe after it's all said and done, funds will have learned their lesson and will stop placing massive bets in hopes of home runs. Probably not. Greed and fear dominate markets.

Yesterday, we saw commodities get hammered all across the board. Now you know what a possible hedge fund liquidation feels like. Most likely, Ospraie was liquidating their positions in order to return money (what's left of it anyways) to investors. I have a feeling this won't be the last big fund to close its doors as volatility in the markets (and specifically the commodity markets) continues.

For more on the story, head on over to Trader Mark's FundMyMutualFund.com. He's summed up the saga in satirical fashion here. Or, if you just want the plain-jane news stories, head here.