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Seems pretty straightforward to me, as a former fund manager. He had swaps so he could get leverage, and then had some concentrated positions in some shares. Th

Seems pretty straightforward to me, as a former fund manager. He had swaps so he could get leverage, and then had some concentrated positions in some shares. They went the wrong way, it ate up all of his capital, and it ate up some of the lenders' capital as well. The thing to remember is it didn't blow up the entire financial system, the banks still have capital left, it's just one guy who took a risk and some banks who took a risk on him. At the other end of the market, retail spreadbetting, this happens all the time. Perhaps not the spreadbetting co blowing up like on the CHF trade, but punters lose their stash when they are leveraged every day. It's basically the business model for some of these shops. The only minor insight this affair gives is that a lot of fund managers are just taking bigger risks, not being better selectors of investments. Eg you could just Martingale bet for a long time and probably look ok, until you look stupid. There's plenty of ways to make it skewed as well, so it's not 50/50 each day whether you make money, you can trade the skewness for the blowup risk.

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anonymouse008 6y ago
I'm not a fund manager - and only took a few classes, so I'm probably way off in this line of questioning... Do you think he and potential compatriots gained additional exposure through the options chain? I'm still struggling to understand how there were $Xm+ weeklies significantly OTM on TSLA and other names the Monday of expiry. Could it be seen as a good investment strategy if you had exposure in other vehicles that just needed to cover the premium (assuming the greeks were right)?
- lordnacho 6y ago
  I haven't looked at the data but he could certainly have bought some kind of structured product to enhance his bet further, which would turn up in the options. Normally the bank would look at your total position and work out from there what they thought your daily risk was, and thus how much margin to ask for. What isn't so easy is to spot the massive whale who's taken the same position with all the banks, so big that he moves the market the wrong way when it goes badly. Then your risk model is pretty useless.
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chollida1 6y ago
> The only minor insight this affair gives is that a lot of fund managers are just taking bigger risks Really? I think there are several take aways that will affect the markets for a while. 1) Prime brokers were blind to his exposure, using multiple prime brokers and also not having to report controlling interest in shares controlled by Swaps let one player control an amount of shares on single firms that no prime broker would ever let their clients control. I'm fairly certain we'll see some overhaul on the swap side to shed more light on what positions they hold, similar to what hedge funds have to file quarterly. 2) Family offices have kind of slid under hte radar, hedge funds have to file quarterly docs on what they hold and report when they control more than 5 or 10%, depending on the jurisdiction. Family offices side step this requirement due to a quirk in securities law. Again I expect this "loop hole" to be closed. 3) One firm essentially was responsible for most of the share price gain for a few individual stocks, specifically viacom where he bought almost all of viacoms share price appreciation. This bullying technique was common in the 80s bond markets due to the small number of players who could buy up bond positions to push them around. Those markets were reformed such that this doesn't really happen too often anymore. Bill, found a cunning way to do this in the securities markets. The SEC is going to look at t his very closely, remember their mandate is to have orderly markets and this ordeal was anything but orderly.
- lordnacho 6y ago
  But are those major? Major would be if someone could blow up so much that we take down Lehmans again, despite all the stuff that's been put in place since. The PB thing is interesting to me, I never took a massive position across PBs but I had assumed if I did they would ask whether I was doing the same trade everywhere. At least when executing FX trades electronically, they all said it was a big no-no to split the trade across banks. > I'm fairly certain we'll see some overhaul on the swap side to shed more light on what positions they hold, similar to what hedge funds have to file quarterly. I bet someone with a bit of crypto knowledge could invent a way to report this without revealing exactly who has what. At least it sounds like one of those zero knowledge games. The FO thing yeah, maybe they shouldn't have that loophole. Single price mover, yeah, I don't think it's healthy. In general I like transparency.
dralley 6y ago
Well, it may not have blown up any banks, but Credit Suisse is kind of imploding right now.

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anonymouse008 6y ago

I'm not a fund manager - and only took a few classes, so I'm probably way off in this line of questioning... Do you think he and potential compatriots gained additional exposure through the options chain? I'm still struggling to understand how there were $Xm+ weeklies significantly OTM on TSLA and other names the Monday of expiry. Could it be seen as a good investment strategy if you had exposure in other vehicles that just needed to cover the premium (assuming the greeks were right)?

lordnacho 6y ago
I haven't looked at the data but he could certainly have bought some kind of structured product to enhance his bet further, which would turn up in the options. Normally the bank would look at your total position and work out from there what they thought your daily risk was, and thus how much margin to ask for. What isn't so easy is to spot the massive whale who's taken the same position with all the banks, so big that he moves the market the wrong way when it goes badly. Then your risk model is pretty useless.
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chollida1 6y ago

> The only minor insight this affair gives is that a lot of fund managers are just taking bigger risks Really? I think there are several take aways that will affect the markets for a while. 1) Prime brokers were blind to his exposure, using multiple prime brokers and also not having to report controlling interest in shares controlled by Swaps let one player control an amount of shares on single firms that no prime broker would ever let their clients control. I'm fairly certain we'll see some overhaul on the swap side to shed more light on what positions they hold, similar to what hedge funds have to file quarterly. 2) Family offices have kind of slid under hte radar, hedge funds have to file quarterly docs on what they hold and report when they control more than 5 or 10%, depending on the jurisdiction. Family offices side step this requirement due to a quirk in securities law. Again I expect this "loop hole" to be closed. 3) One firm essentially was responsible for most of the share price gain for a few individual stocks, specifically viacom where he bought almost all of viacoms share price appreciation. This bullying technique was common in the 80s bond markets due to the small number of players who could buy up bond positions to push them around. Those markets were reformed such that this doesn't really happen too often anymore. Bill, found a cunning way to do this in the securities markets. The SEC is going to look at t his very closely, remember their mandate is to have orderly markets and this ordeal was anything but orderly.

lordnacho 6y ago
But are those major? Major would be if someone could blow up so much that we take down Lehmans again, despite all the stuff that's been put in place since. The PB thing is interesting to me, I never took a massive position across PBs but I had assumed if I did they would ask whether I was doing the same trade everywhere. At least when executing FX trades electronically, they all said it was a big no-no to split the trade across banks. > I'm fairly certain we'll see some overhaul on the swap side to shed more light on what positions they hold, similar to what hedge funds have to file quarterly. I bet someone with a bit of crypto knowledge could invent a way to report this without revealing exactly who has what. At least it sounds like one of those zero knowledge games. The FO thing yeah, maybe they shouldn't have that loophole. Single price mover, yeah, I don't think it's healthy. In general I like transparency.

dralley 6y ago

Well, it may not have blown up any banks, but Credit Suisse is kind of imploding right now.