Monday, May 14, 2007

SA's first hedge fund blow-up

Since late last week a lot has been written about the demise of a hedge fund, The Evervrest Aggresive Fund, and surely more will be written about it.

To read the full story, click

So how did the fund manager, Marc van Veen, managed to lose 66% of the fund value in the space of 1 month, especially when the stock market continued to boom?

This is because a typical hedge fund uses financial instruments such as futures and CFD's (contracts for differences) to obtain gearing / leverage, in order to try to increase returns. In addition, a fund manager can short the stock, meaning to borrow shares in a company he does not own, selling them in the market, with the hope of making a profit by buying them back at a lower price.

This is what Marc van Veen did. He anticipated Sanlam's share price to fall. He took a large short position on Sanlam and expected to make a handsome profit on this position.

Alas, Sanlam's share price continued to rise, by as much as 17% in April. And the expected handsome profit turned out to be severe losses.

It seems to me this fund manager did not use the correct money management techniques, including stop loss and diversification. If he had employed these techniques, the losses would not have been as large.

The following links take you to related articles.

Hedge Funds: how not to burn your fingers

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