Okay you asked for a heroic hedge fund story, to balance all the blowups I tell you about.
This is sort of in between, like doofy heroism.
We were the Wells Fargo prop desk. Not the most legendary and storied of prop desks. Actually possibly the least legendary.
This is sort of in between, like doofy heroism.
We were the Wells Fargo prop desk. Not the most legendary and storied of prop desks. Actually possibly the least legendary.
We traded capital structure arbitrage and convertible bond arbitrage. That means, for example, buying senior secured debt and shorting unsecured debt against it, or buying cash bonds and hedging with CDS, or trading credit vs equity, or converts delta neutral.
Our big boss was famous for being an insane athlete. My job interview with him was on a bike going up Carson Pass at 8,000 feet. He was 50+ years old, I was 28, he dusted me like a bug when we hit the steeps
In 2008 the prop desk took a pretty big hit on Lehman like every other prop desk. Bond basis exploded, convertible bond floors
collapsed, everything went completely wonky. Lost hundreds of millions of dollars.
collapsed, everything went completely wonky. Lost hundreds of millions of dollars.
Critically, Wells Fargo was a very boring, conservative bank that had absolutely zero risk to mezzanine tranches of subprime CDOs, CDO^2's, and all the rest of the toxic sludge that blew up the banking system in 2008. Their balance sheet was solid.
The big boss may have been goofy but he knew corporate politics. He went to the C-suite and said look, yeah we just lost a little money, but everyone is puking assets uncontrollably and this is a once in a lifetime opportunity for the bank
Instead of getting fired, the prop desk got a 10x increase in capital, when every other Wall Street prop desk was having their positions liquidated regardless of how good they were
Wells Prop was the last buyer in the market for converts, leveraged loans, basis packages, every balance sheet sensitive funding risk security you could find. Its trades were known as "the West Coast Flows" in the dealer community
The trades were insane. Convertible bonds at zero implied volatility. Bond basis packages (buy cash bond, buy CDS protection) at 20% IRR. Senior secured debt yielding more than unsecured CDS.
Not because we were smart, because we were the only big desk with billions of unencumbered cash, while everyone else was working on getting bailed out
In 2009 all this stuff snapped back and the desk made more money than God. I was just the fresh-out-of-PhD quant, I had nothing to do with it, but I got to watch
The prop desk spun out of Wells Fargo as a hedge fund called Overland Advisors as Dodd-Frank was coming. It was a fun batch of people, some of whom are on here, they can raise their hands if they want to.
Lesson here is its a hell of a lot better to be lucky than good, and also there's absolutely nothing wrong with being boring and conservative and avoiding the newest hype in markets.
If you are the last person standing when blood is running in the streets you don't have to be smart you just make infinite money.
By the way, this is one of the reasons why skew exists in equity derivatives. The value of a dollar in November 2008 with risk assets annhialated is massively higher than the value of a dollar at ATHs, because opportunity is everywhere.
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