Does a 1,000% gain make a hedge fund manager a genius or a contrary indicator?
From the FT:
A Californian hedge fund has made more than 1,000 per cent return this year by betting against US subprime home loans, making it one of the world's best-performing funds of all time.
Lahde Capital, set up in Santa Monica last year by Andrew Lahde, last week passed the 1,000 per cent mark, after fees, following the latest leg of the credit market turmoil. ...
However, Mr Lahde ... has now begun to return money to investors, telling them in a letter: “The risk/return characteristics are far less attractive than in the past.”
In his letter, Mr Lahde said he expected the collapse in value of subprime mortgage-linked securities to be repeated for bonds backed by commercial property loans in a deep recession – which he also predicts.
“Our entire banking system is a complete disaster,” he wrote. “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.” He also said he would be putting some of his own profits into gold and other precious metals.
This raises an interesting question. Should you take Lahde's continued bearishness as a signal to join him in his gloom, or should you figure that a 1,000% gain cries out for mean reversion, and buy bank stocks? I have no idea what the right answer is. But it's a question that consumers of investment advice should always be asking themselves.
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1
Securitized commercial property loans certainly provided much of the financing for the recent commercial property boom, and at fairly low interest rates. But were owners of commercial property getting "teaser rate" loans, or 100% financing with no documentation of their ability to repay? I don't think that kind of madness ever made its way into the commercial property loan market. So it doesn't seem right to draw automatic parallels to the subprime residential mortage market.
If we do go into a deep recession, then of course there will be a significant increase in defaults on commercial property loans. But for now, apartment rents are rising in most markets so the risk of defaults on apartment loans is low, and other commercial properties are doing well or poorly depending on the health of the particular markets they are in (I would much rather own commercial property in Silicon Valley right now than in Detroit). Loans on commercial properties are subject to the usual business-cycle risks, but the "lenders lost their minds" risks don't seem to be there, or at least not on anything approaching the scale of what has happened with residential mortgages.
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Anyone who wasn't under pressure to follow the herd could see what was coming here. Lahde may have been lucky on hitting the timing right, or he may have had data that provided evidence for a specific timeframe of the reversal. Either way, I'll venture to guess that unless Lahde has an ego the size of the subprime debt, he is thanking the gods for his combination of common sense and good fortune. And like any good gambler, he's taking his money off the table.
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