Hedge Funds

From: Tilotia Akhilesh
Sent: Tuesday, October 18, 2005 9:21 AM

To: Iyer Ramganesh; Pawar Swapnil; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

am not sure why we need less liquidity - is not the fundamental premise that more the liquidity the better the price discovery? and in the case of the hedge funds, the "limited utility" that they provide is not just in terms of the increased liquidity but their ability (and willingness) to remove even the smallest of arbitrages (through all the convoluted deals, etc)
also, speculation is very different from manipulation - which is what these crashed funds had gotten into. in case of both bayou and refco, they hid 400 mn$ each of their losses as assets - not unlike what enron did. it is a more basic case of the "accounting" regulator not being able to devise a better disclosure mechanism than for the "market" regulator to stop them from manipulating the markets...for SECs and SEBIs of the world, the problem is to identify the black sheep - who is the fellow who is most probable to indulge in manipulation (as opposed to speculation and plain arbitraging)....
the trick there would be to distill learnings from these disasters and devise some early warning mechanism...some I could think of (and 1 can devise a framework):
1. flamboyant advertising (HomeTrade in India)
2. significantly high returns earned by the fund - are they "asset"ing their losses to show a good performance
3. sudden spurt in business volumes - esp if prompted by point 2 above
I guess the point that I am going back to is the same one that we made in the small paper we wrote: hedge funds need more regulation in terms of assessing their health on a periodic basis...may not be stifling regulations that take the creativity out of them, but such that their risks are known to the market at large
thoughts / ideas?
cheers,
akhilesh
ps: should we be blogging all the mails? much easier to keep a record also.
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From: Iyer Ramganesh
Sent: Monday, October 17, 2005 11:37 AM

To: Pawar Swapnil; Tilotia Akhilesh; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

one simple way is to exactly reverse the current STT structure for day trading vs. delivery
ramg

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From: Pawar Swapnil
Sent: Monday, October 17, 2005 11:31 AM

To: Iyer Ramganesh; Tilotia Akhilesh; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

so the next question is how do you promote liquidity without promoting speculation of the chart types?
i would go a step further and question, how much liquidity do we need? or let's say, can we do with less liquidity?
to me, the purpose of liquidity is efficient price discovery..
any ideas?
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From: Iyer Ramganesh
Sent: Monday, October 17, 2005 11:27 AM

To: Pawar Swapnil; Tilotia Akhilesh; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

exactly
their limited utility is in ensuring liquidity
i am opposed to it going through the roof, as it quickly tends to do
ramg


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From: Pawar Swapnil
Sent: Monday, October 17, 2005 11:22 AM

To: Iyer Ramganesh; Tilotia Akhilesh; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

i am somewhat more liberal than that..
i would say, let them speculte in casinos and horse races..
some idiotic hedge funds playing with psyche of managements is not very healthy..
i doubt value of such a stock market most of whose active participants are speculators ... and that too not on how something will affect a company and its value but on how majority will think about it.. you know a second order speculation..
agreed that these guys provide the much needed liquidity to the securities.. but they become a bloody pain when they go belly down..
if they need to be promoted only for liquidity, i think we need to look at better solutions..
what say?
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From: Iyer Ramganesh
Sent: Monday, October 17, 2005 11:14 AM

To: Tilotia Akhilesh; Pawar Swapnil; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

i think speculation in any form is avoidable... and when such activity goes through the roof, regulators have to step in to stop it....
in any case as saand said, in india they are insignificant. if they cause some panic in US stock markets, just all the better...
thats why i think charging lower taxes for day trading and all are retrograde steps, encouraging such speculation as against term investment.. so before india goes the same way, we shud correct our laws
ramg


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From: Tilotia Akhilesh
Sent: Monday, October 17, 2005 11:10 AM

To: Iyer Ramganesh; Pawar Swapnil; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

we might think low of hedge funds, america, mcdonalds, etc etc...
but these things do have a huge value attached to them and when they crash, they take the whole damn world down with them! :(
cheers,
akhilesh
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From: Iyer Ramganesh
Sent: Monday, October 17, 2005 11:07 AM

To: Tilotia Akhilesh; Pawar Swapnil; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

i hope so
i think pretty low of hegde funds anyway
ramg
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From: Tilotia Akhilesh
Sent: Saturday, October 15, 2005 1:49 PM

To: Iyer Ramganesh; Pawar Swapnil; Raja Kanishka
Subject: 3 hedge funds have crashed in the last month or so...

Wood River Capital
Bayou
Refco
Will this be the next big challenge facing the financial markets?
Cheers,
akhilesh