Saturday, January 17, 2015

Macro hedge fund Everest Capital crushed by EURCHF move

I'm sad to read today on Bloomberg about Everest Capital's oldest hedge fund biting the dust over the moves in the EURCHF. Marko is a legend and has weathered some incredible storms out there. Everest is one of the longer running global macro shops out there and their founder was interviewed in one of my favorites books Inside the House of Money by Steven Drobny.

My question is what kind of leverage was Everest running to get knocked out like this? In our hedge fund we were short EURCHF in 2012 with a significant risk allocation to the trade of 5%. While we were correct on the ultimate collapse of the peg we were WAY too early. We also sadly got stopped out when the EURCHF moved up to 1.26. Risking 1-3% on a trade is the norm, 5% is maxed out when the asymmetry and conviction is off the charts - which is how we felt about the EURCHF situation.  So again I ask what kind of leverage could Everest have been running to get smoked like that? If we look at the move of EURCHF on Jan 15, 2015 it moved from 1.20 to a touch under 0.84 Let's call that 36 pts. So rough math is 3x their entire portfolio. 3x is not so scary for a single position but 3x your whole book is BIG. It would be interesting to see if any internal risk limits were violated with the sizing of this position.

Either way I don't wish to see any global macro managers blow up. Global macro is an excellent style that very much has its place in any portfolio at any time. It's disappointing to see new managers and old all struggling IMHO what is an exceptional time period for macro managers to excel.

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