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Well, that didn't take long. John Meriwether, whose previous two hedge funds have blown up in spectacular fashion, is starting his third.
The FT reports this morning that Meriwether is starting a new Greenwich-based fund that will draw upon strategies he first used during his days in the bond arbitrage group at Solomon Brothers in the 1980s. That is, his new fund will look for pricing disparities on a range of assets across the world and wager that the prices will soon return to historic norms. The technical term for the strategy is “relative value arbitrage” and it's often used to take advantage of market turmoil when asset prices get out whack.
But this is typically a risky business because the funds’ returns depend on lots of leverage.
Meriwether's most recent fund, JWM Partners, borrowed 10 times more money than it had in investors' capital, before closing earlier this year . Meritwether's first hedge fund, Long-Term Capital Management, had leverage of 25 times investor capital. When LTCM ran into problems in 1998, the Federal Reserve prodded a group of banks to pony up $3.5 billion to rescue it, fearing that its collapse could endanger the financial system. (It may be hard to believe, but back then a $3.5 billion bail out seemed liked a big deal.)
It's not clear how much leverage Merriwether and his merry band of investors will be willing to stomach in the latest fund. (The fund, which will be called JM Advisors Managements, is slated to open next year, according to the FT) But in some ways that’s beside the point. The fact that Merriwether – whose name is synonymous with the high-flying hedge fund boom earlier this decade — is back in action says a lot more about investors’ overall appetite for risk. Namely, it’s back.
This comes as the investment banks, such as Goldman Sachs and Morgan Stanley, are ramping up risk by trading with more of their own capital. Just yesterday Morgan Stanley reported that its trading value at risk, or VaR, had increased to $118 million in the third quarter from $113 million in the second quarter, helping boost profits. To be sure, Morgan Stanley is still playing it safe, having lowered its leverage to about 15.7 times.
In some ways, Merriwhether may be late to the party . World stock marke ts have rallied, credit spread s have tighten ed and liquidity has begun to flow again through the financial system again. Merriwether's arbitrage strategy has been described as taking a large vacuum cleaner to suck up nickels all across the world. But the survivors on Wall Street have already been combing that beach for months.
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Maybe Henry Blodgett and JM can hook up and write a book….
I wonder how much he will cost taxpayers this time around?
Author wrote “merry band of investors.” Surely, (don’t call me Surely) he meant merry band of pranksters. This must be a prank. Isn’t it?
Ho, Ho, Ho… Don Key-OAT-TEE! No so fast there buddy… “Using their own captial… are you sure that GS and MS arn’t using the Us US Tax Payer’s funding their ramp up of risk?
What does this say for the current market that JM can again start a fund. The old saying still works, “A fool and his money are soon parted”. Americans are the most positive, optimistic individuals on the planet bar none. Ths is partly what keeps us moving forward in the face of great challenges. The only positive I see here is that it will again be wealth investors losing their money, not the rank and file.
Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal's Michael Corkery is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to deals@wsj.com.
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