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Wiped-Out Hedge Fund Manager Confessed His Losses on YouTube

103 points by pdog 8y ago

ilamont 8y ago
The photo at the top of the article reminded me of a sight in northern New York, and apparently being duplicated in many parts of the country: Tens of thousands of obsolete and unneeded tanker cars sitting idle on rural sidings and unused lines: https://www.npr.org/2015/09/14/440173575/what-to-do-with-railroad-tank-cars-that-are-no-longer-safe-or-economical https://www.npr.org/2015/09/14/440173575/what-to-do-with-rai... The collection I saw last year next to Route 12 in New York was at least 10 miles long, and there is another one in the Adirondacks. It's an eyesore to say the least ... possibly a pending environmental hazard. If there's a declining need for oil to be transported around the country on trains, and the cars are expensive to recycle or transform, what will happen to them?
- mrunkel 8y ago
  Likely the same thing that happened to all the mills throughout the rust belt. They'll get abandoned. The pessimist in me says that they'll get sold to a new corporate entity which will then file for bankruptcy and the government at some level will need to clean it up.
Tomminn 8y ago
I find this difficult to watch. The only thing that would make this less difficult for me to watch is if he had his personal fortune invested in his hedge fund also, and so was similarly wiped out. In which case I'd like to hear it. Otherwise if I was an investor I couldn't help but think: "sure, but you only lose our 2 and 20 this year, what happened to the 2 and 20 you made through the last few decades?". It would actually be an interesting law: "Operators of investments must have a higher fraction of their wealth invested in the fund than any of their investors". Obviously difficult to implement but the spirit of it is fascinating to me. That way, when a hedge fund fails, the entity which has been the most ruined by it (fractionally speaking) is the CEO. It'd create genuine skin in the game.
- tomp 8y ago
  It’s a free market, you can easily decide on your own who to invest in. You could just as well say, the investors (who should have been highly diversified, if they’re not completely retarded, btw) were making a lot of “rent-seeking” profits without any effort or skill on their own for years...
- spitfire 8y ago
  That's the idea behind Nicholas Nassim Taleb's most recent book "skin in the game". People should be exposed to the downside risks of their actions.
  - Tomminn 8y ago
    Yeah, I was 100% cribbing off Taleb's broad point, which I'm familiar with. Do you know if he's suggested this particular idea, or something similar?
chollida1 8y ago
Such is the life of an option seller, especially naked option sellers. You are picking up the proverbial nickle in front of the steam roller. The really unfortunate part of this is that some of his clients actually owe more money than what was in their account. There is a scummy way of managing money that some CTA's use where you don't get the proper license to manage others money as a hedge fund and instead just have people put money into accounts and then they give you the right to trade. Due to the use of leverage when the market moved against their naked short Nat Gas positions all the collateral posted in the accounts were not enough to covert the losses so some people are not only out the amount they wagered, but more. And the worst part of it is the manager blaming this on an unforeseen event. Everyone who sells options knows that rule one is never be naked when you are short as your losses can be unbounded. The reason for this is that if you have traded for even a short period of time you realized that while the market is liquid most of hte time, there are times when its not and the only thing you can do is watch it move while realizing you can't exit a position. This happend to short sellers of KBIO when they thought they were riding a shitty stock to zero, when Martin Shkreli bought it for a premium causing margin calls for everyone short it. See: https://www.investopedia.com/articles/investing/112315/did-martin-shkreli-intentionally-burn-kalobios-shorts.asp https://www.investopedia.com/articles/investing/112315/did-m... As a side note Martin has a blog. http://martinshkreli.com/ http://martinshkreli.com/ its actually pretty good as this is what he does for a living and when hes out of prison he's going to try and go back to it so this is really the only way he can redeem his brand. I expect him to put everything he has into the blog. its' a good source of trading ideas. TL/DR - never sell options - if you do then never sell naked options - if you do make sure you can get out of your trade - if you can't get out of your trade make sure you are well capitalized for loss absorption - if don't have enough to cover your losses don't apologize for losing your clients money while wearing a $10,000 watch and post it for the rest of the world to see.
- AznHisoka 8y ago
  Why would his clients owe money? The fund is the one doing the trading, so it's the fund that would owe money.
  - 8y ago
johnwheeler 8y ago
I can't believe he'd say, "I owe you a cuban sandwich" to someone whose life-savings he presumably gambled away on options. I seriously thought this was the Onion when I heard that. https://www.youtube.com/watch?v=VNYNMM0hXXY&feature=youtu.be&t=128 https://www.youtube.com/watch?v=VNYNMM0hXXY&feature=youtu.be...
- JumpCrisscross 8y ago
  > someone whose life-savings he presumably gambled away on options It’s a stupid line. But nobody with any sense has more than 5% of their portfolio in a single hedge fund.
  - johnwheeler 8y ago
    Bernie Madoff wiped a bunch of people out.
    - tomp 8y ago
      Who were greedy and seeking easy profit. People go broke in casinos as well. Doesn’t make it immoral to be run a (“fair”) casino, or a smart idea to bet all your life savings.
      - SirLJ 8y ago
        Wow, easy there... a lot of ordinary people and foundations were wiped out by Bernie, not to mention other funds where clients didn't know they were investing with him...
  - alexbecker 8y ago
    Lots of people have no sense though.
    - JumpCrisscross 8y ago
      > Lots of people have no sense This population tends to select itself out of the hedge fund LP investor community. (Into, for example, cryptocurrencies.)
DrNuke 8y ago
Extending this man a hug in this professionally devastating time and hoping his inner circle makes sure he stays afloat himself.
- mylons 8y ago
  i wouldn't necessarily wish this guy well. he basically ran his hedge fund in such a way that left his clients even more exposed to the risk of his poor decisions. not only did people lose money, they owe money.
- whatok 8y ago
  This guy deserves no sympathy. He gambled his client's money in an extremely irresponsible manner.
  - tomp 8y ago
    How do you know he “gambled in an extremely irresponsible manner”? Was he misrepresenting the risks he was taking in some way? The domain “optionsellers.com” suggests he was rather transparent...
    - JumpCrisscross 8y ago
      > How do you know he “gambled in an extremely irresponsible manner”? He got wiped out by a single delta. He was repeatedly taking leveraged bets, and ultimately losing strategy.
    - whatok 8y ago
      This person claims that they were an investor and put together a spreadsheet with several days of NG trades. What I see is someone being irresponsible. https://twitter.com/waklyn1/status/1064307589578579968 https://twitter.com/waklyn1/status/1064307589578579968
      - jhall1468 8y ago
        That looks like a well-informed investor understanding full-well that they were buying naked options and the enormous risks associated with that.
Bootvis 8y ago
It appears that this fund was mostly in the business of selling options. Nassim Taleb often warns this is a dumb idea because in the long run something bad will happen from which you can't recover. I tend to agree and while it's sad for those involved I believe they can only blame themselves. They haven't been prudent.
- jhall1468 8y ago
  Options are extremely high risk and should be avoided. Naked options are an excellent way to part a fool and his money. Investing in anything that potentially exposes you to unlimited losses is eventually going to expose you to unlimited losses and you can't make that up with volume.
- DINKDINK 8y ago
  >Nassim Taleb often warns this is a dumb idea because in the long run something bad will happen from which you can't recover. Specifically, this is called ergodic collapse.
tlrobinson 8y ago
I have no experience investing in hedge funds, but I feel like having a name like "OptionSellers.com" might be a red flag?
- jhall1468 8y ago
  Why? That's literally what he does.
apo 8y ago
Seems like a non-apology. It was all the "rogue wave" that "capsized the boat." If a fund can't manage volatility surges, the blame isn't the rogue wave that, out of nowhere blew everything to smithereens, but the guy who steered right into it. It's the difference between being sorry that the house you destroyed with a car was in your path vs. being sorry for having left the party drunk.
- jhall1468 8y ago
  I mean, nobody can manage volatility 100% of the time when they are selling naked options.
hermitdev 8y ago
This is bad, but $150M lost in the natural gas market is not the worst I've seen. There was Brian Hunter of Amaranth [1] fame that blew up a $9B hedge fund with a bad NG trade. Amaranth had to liquidate assets for pennies on the dollar to cover the margin calls. Wikipedia is note entirely correct, here, though. It says that JP Morgan & Citadel bought the assets, but it was Citadel that bought them all at the end of the day. My understanding at the time was that JPM couldn't calculate in time the risk involved with the assets they were planning on buying. [1] https://en.wikipedia.org/wiki/Brian_Hunter_(trader) https://en.wikipedia.org/wiki/Brian_Hunter_(trader)
- whatok 8y ago
  Centaurus/John Arnold was another party here. While they were not part of the liquidation they had ridiculous returns that year as a result of the Amaranth situation. The book Hedge Hogs is a good read on Amaranth. Dollar amount aside, I'd argue this is worse in some ways because it dealt with individual investors who are now figuring out how to fund margin calls.
Humdeee 8y ago
Tragic. From the video, I half expected him to put a gun in his mouth at the end of it. What happens now for this guy? He mentions it likely wiped out his firm. Likely? How can anyone who has done this have any chance to remain in business, and feel secure enough not to even go into hiding? If the losses are unbounded, can a number of his clients be totally wiped out, even if they were diversified? He'll continue to wear a watch worth more than my car, and have a suit worth more than all my clothes combined. I have a hard time imagining his lifestyle will even suffer.
- segmondy 8y ago
  You sound envious.
  - Humdeee 8y ago
    ... his entire reputation is ruined. How does somebody come back from this? I like sleeping with both eyes closed at night, don't you?
- anthonybsd 8y ago
  >He'll continue to wear a watch worth more than my car It's a Rolex Datejust 41mm, $9350. And it can be had new from a dealer for less than that. Just an FYI :)
- _Nat_ 8y ago
  I was pretty confused by how he framed this video. What was weird was his constant reiteration of the point that he's been living well, enjoying a well-to-do, leisurely sounding lifestyle. I mean, if that's the case, good for him, but why would he keep stressing that point so heavily in a video about how he lost a lot of his clients' wealth? It sounds like he's someone who did inspire confidence in investors, but how would his self-described behavior do that?
nighthawk1 8y ago
I think now would be a great time to open a new account. What could go wrong? https://www.optionsellers.com/accounts/ https://www.optionsellers.com/accounts/
jorblumesea 8y ago
This man has no right handling other peoples' money. This is sheer incompetence.
icu 8y ago
I'm sorry for the destruction of wealth on one side, but the traders on the other side made a killing. What happened here is fat tail risk that is always present in the market.
yread 8y ago
Is there blood in the streets yet?
noddy1w 8y ago
A good thought experiment is to imagine a hedge fund which invests in the s&p500 all the time, but once per year takes all its capital and sells options with a 5% return and a roughly 1/20 risk of ruin. On average they beat the s&p500 by 5% every year, and only explode once every 20 years on average. If you could charge 2 and 20 and smoothtalk investors the chances that you get rich before it explodes are pretty good. Differentiating an investment with a negligible chance of going to zero (like the s&p500) from one with a small but nonzero chance is difficult until one of them explodes.

103 points by pdog 8y ago

The photo at the top of the article reminded me of a sight in northern New York, and apparently being duplicated in many parts of the country: Tens of thousands of obsolete and unneeded tanker cars sitting idle on rural sidings and unused lines: https://www.npr.org/2015/09/14/440173575/what-to-do-with-railroad-tank-cars-that-are-no-longer-safe-or-economical https://www.npr.org/2015/09/14/440173575/what-to-do-with-rai... The collection I saw last year next to Route 12 in New York was at least 10 miles long, and there is another one in the Adirondacks. It's an eyesore to say the least ... possibly a pending environmental hazard. If there's a declining need for oil to be transported around the country on trains, and the cars are expensive to recycle or transform, what will happen to them?

mrunkel 8y ago
Likely the same thing that happened to all the mills throughout the rust belt. They'll get abandoned. The pessimist in me says that they'll get sold to a new corporate entity which will then file for bankruptcy and the government at some level will need to clean it up.

Tomminn 8y ago

I find this difficult to watch. The only thing that would make this less difficult for me to watch is if he had his personal fortune invested in his hedge fund also, and so was similarly wiped out. In which case I'd like to hear it. Otherwise if I was an investor I couldn't help but think: "sure, but you only lose our 2 and 20 this year, what happened to the 2 and 20 you made through the last few decades?". It would actually be an interesting law: "Operators of investments must have a higher fraction of their wealth invested in the fund than any of their investors". Obviously difficult to implement but the spirit of it is fascinating to me. That way, when a hedge fund fails, the entity which has been the most ruined by it (fractionally speaking) is the CEO. It'd create genuine skin in the game.

tomp 8y ago
It’s a free market, you can easily decide on your own who to invest in. You could just as well say, the investors (who should have been highly diversified, if they’re not completely retarded, btw) were making a lot of “rent-seeking” profits without any effort or skill on their own for years...
spitfire 8y ago
That's the idea behind Nicholas Nassim Taleb's most recent book "skin in the game". People should be exposed to the downside risks of their actions.
- Tomminn 8y ago
  Yeah, I was 100% cribbing off Taleb's broad point, which I'm familiar with. Do you know if he's suggested this particular idea, or something similar?

chollida1 8y ago

Such is the life of an option seller, especially naked option sellers. You are picking up the proverbial nickle in front of the steam roller. The really unfortunate part of this is that some of his clients actually owe more money than what was in their account. There is a scummy way of managing money that some CTA's use where you don't get the proper license to manage others money as a hedge fund and instead just have people put money into accounts and then they give you the right to trade. Due to the use of leverage when the market moved against their naked short Nat Gas positions all the collateral posted in the accounts were not enough to covert the losses so some people are not only out the amount they wagered, but more. And the worst part of it is the manager blaming this on an unforeseen event. Everyone who sells options knows that rule one is never be naked when you are short as your losses can be unbounded. The reason for this is that if you have traded for even a short period of time you realized that while the market is liquid most of hte time, there are times when its not and the only thing you can do is watch it move while realizing you can't exit a position. This happend to short sellers of KBIO when they thought they were riding a shitty stock to zero, when Martin Shkreli bought it for a premium causing margin calls for everyone short it. See: https://www.investopedia.com/articles/investing/112315/did-martin-shkreli-intentionally-burn-kalobios-shorts.asp https://www.investopedia.com/articles/investing/112315/did-m... As a side note Martin has a blog. http://martinshkreli.com/ http://martinshkreli.com/ its actually pretty good as this is what he does for a living and when hes out of prison he's going to try and go back to it so this is really the only way he can redeem his brand. I expect him to put everything he has into the blog. its' a good source of trading ideas. TL/DR - never sell options - if you do then never sell naked options - if you do make sure you can get out of your trade - if you can't get out of your trade make sure you are well capitalized for loss absorption - if don't have enough to cover your losses don't apologize for losing your clients money while wearing a $10,000 watch and post it for the rest of the world to see.

AznHisoka 8y ago
Why would his clients owe money? The fund is the one doing the trading, so it's the fund that would owe money.
- 8y ago

johnwheeler 8y ago

I can't believe he'd say, "I owe you a cuban sandwich" to someone whose life-savings he presumably gambled away on options. I seriously thought this was the Onion when I heard that. https://www.youtube.com/watch?v=VNYNMM0hXXY&feature=youtu.be&t=128 https://www.youtube.com/watch?v=VNYNMM0hXXY&feature=youtu.be...

JumpCrisscross 8y ago
> someone whose life-savings he presumably gambled away on options It’s a stupid line. But nobody with any sense has more than 5% of their portfolio in a single hedge fund.
- johnwheeler 8y ago
  Bernie Madoff wiped a bunch of people out.
  - tomp 8y ago
    Who were greedy and seeking easy profit. People go broke in casinos as well. Doesn’t make it immoral to be run a (“fair”) casino, or a smart idea to bet all your life savings.
    - SirLJ 8y ago
      Wow, easy there... a lot of ordinary people and foundations were wiped out by Bernie, not to mention other funds where clients didn't know they were investing with him...
- alexbecker 8y ago
  Lots of people have no sense though.
  - JumpCrisscross 8y ago
    > Lots of people have no sense This population tends to select itself out of the hedge fund LP investor community. (Into, for example, cryptocurrencies.)

DrNuke 8y ago

Extending this man a hug in this professionally devastating time and hoping his inner circle makes sure he stays afloat himself.

mylons 8y ago
i wouldn't necessarily wish this guy well. he basically ran his hedge fund in such a way that left his clients even more exposed to the risk of his poor decisions. not only did people lose money, they owe money.
whatok 8y ago
This guy deserves no sympathy. He gambled his client's money in an extremely irresponsible manner.
- tomp 8y ago
  How do you know he “gambled in an extremely irresponsible manner”? Was he misrepresenting the risks he was taking in some way? The domain “optionsellers.com” suggests he was rather transparent...
  - JumpCrisscross 8y ago
    > How do you know he “gambled in an extremely irresponsible manner”? He got wiped out by a single delta. He was repeatedly taking leveraged bets, and ultimately losing strategy.
  - whatok 8y ago
    This person claims that they were an investor and put together a spreadsheet with several days of NG trades. What I see is someone being irresponsible. https://twitter.com/waklyn1/status/1064307589578579968 https://twitter.com/waklyn1/status/1064307589578579968
    - jhall1468 8y ago
      That looks like a well-informed investor understanding full-well that they were buying naked options and the enormous risks associated with that.

Bootvis 8y ago

It appears that this fund was mostly in the business of selling options. Nassim Taleb often warns this is a dumb idea because in the long run something bad will happen from which you can't recover. I tend to agree and while it's sad for those involved I believe they can only blame themselves. They haven't been prudent.

jhall1468 8y ago
Options are extremely high risk and should be avoided. Naked options are an excellent way to part a fool and his money. Investing in anything that potentially exposes you to unlimited losses is eventually going to expose you to unlimited losses and you can't make that up with volume.
DINKDINK 8y ago
>Nassim Taleb often warns this is a dumb idea because in the long run something bad will happen from which you can't recover. Specifically, this is called ergodic collapse.

tlrobinson 8y ago

I have no experience investing in hedge funds, but I feel like having a name like "OptionSellers.com" might be a red flag?

jhall1468 8y ago
Why? That's literally what he does.

apo 8y ago

Seems like a non-apology. It was all the "rogue wave" that "capsized the boat." If a fund can't manage volatility surges, the blame isn't the rogue wave that, out of nowhere blew everything to smithereens, but the guy who steered right into it. It's the difference between being sorry that the house you destroyed with a car was in your path vs. being sorry for having left the party drunk.

jhall1468 8y ago
I mean, nobody can manage volatility 100% of the time when they are selling naked options.

hermitdev 8y ago

This is bad, but $150M lost in the natural gas market is not the worst I've seen. There was Brian Hunter of Amaranth [1] fame that blew up a $9B hedge fund with a bad NG trade. Amaranth had to liquidate assets for pennies on the dollar to cover the margin calls. Wikipedia is note entirely correct, here, though. It says that JP Morgan & Citadel bought the assets, but it was Citadel that bought them all at the end of the day. My understanding at the time was that JPM couldn't calculate in time the risk involved with the assets they were planning on buying. [1] https://en.wikipedia.org/wiki/Brian_Hunter_(trader) https://en.wikipedia.org/wiki/Brian_Hunter_(trader)

whatok 8y ago
Centaurus/John Arnold was another party here. While they were not part of the liquidation they had ridiculous returns that year as a result of the Amaranth situation. The book Hedge Hogs is a good read on Amaranth. Dollar amount aside, I'd argue this is worse in some ways because it dealt with individual investors who are now figuring out how to fund margin calls.

Humdeee 8y ago

Tragic. From the video, I half expected him to put a gun in his mouth at the end of it. What happens now for this guy? He mentions it likely wiped out his firm. Likely? How can anyone who has done this have any chance to remain in business, and feel secure enough not to even go into hiding? If the losses are unbounded, can a number of his clients be totally wiped out, even if they were diversified? He'll continue to wear a watch worth more than my car, and have a suit worth more than all my clothes combined. I have a hard time imagining his lifestyle will even suffer.

segmondy 8y ago
You sound envious.
- Humdeee 8y ago
  ... his entire reputation is ruined. How does somebody come back from this? I like sleeping with both eyes closed at night, don't you?
anthonybsd 8y ago
>He'll continue to wear a watch worth more than my car It's a Rolex Datejust 41mm, $9350. And it can be had new from a dealer for less than that. Just an FYI :)
_Nat_ 8y ago
I was pretty confused by how he framed this video. What was weird was his constant reiteration of the point that he's been living well, enjoying a well-to-do, leisurely sounding lifestyle. I mean, if that's the case, good for him, but why would he keep stressing that point so heavily in a video about how he lost a lot of his clients' wealth? It sounds like he's someone who did inspire confidence in investors, but how would his self-described behavior do that?

nighthawk1 8y ago

I think now would be a great time to open a new account. What could go wrong? https://www.optionsellers.com/accounts/ https://www.optionsellers.com/accounts/

jorblumesea 8y ago

This man has no right handling other peoples' money. This is sheer incompetence.

icu 8y ago

I'm sorry for the destruction of wealth on one side, but the traders on the other side made a killing. What happened here is fat tail risk that is always present in the market.

yread 8y ago

Is there blood in the streets yet?

noddy1w 8y ago

A good thought experiment is to imagine a hedge fund which invests in the s&p500 all the time, but once per year takes all its capital and sells options with a 5% return and a roughly 1/20 risk of ruin. On average they beat the s&p500 by 5% every year, and only explode once every 20 years on average. If you could charge 2 and 20 and smoothtalk investors the chances that you get rich before it explodes are pretty good. Differentiating an investment with a negligible chance of going to zero (like the s&p500) from one with a small but nonzero chance is difficult until one of them explodes.