Canadian hedge fund accused of illegally valuing securities
“We make our returns or business grow by having an edge that is not transparent,” Mr. Spork told The Globe and Mail at that time.
Well, Mr Spork's hedge fund investors now know what he meant by lack of transparency: by making up the numbers.
His funds were the envy of the imploding hedge fund sector, managing to deliver a 159-per-cent return so far in a year marred by the worst bear market in decades. Now Otto Spork, a former dentist, is facing allegations that the fund's returns were juiced by unsubstantiated valuations in several underlying investments in Icelandic glaciers.
The Ontario Securities Commission has ordered Mr. Spork and related parties at Sextant Capital Management Inc. to temporarily stop selling his fund in Canada, alleging it is “investing illegally” in firms with rights to the glaciers.
I suppose anyone investing in Icleandic glaciers of all things knew of the risks they were taking. Although, it's not clear one would assume that the hedge fund investors knew what their fund was planning to, and ultimately, invested in.
I still lurk around once in a while, though lately I've been tied up @ work & home, so haven't had much of a chance to comment.
ReplyDeleteI did read the piece about YMM in the WSJ yesterday though. It was yet another mea culpa, this time quite a bit more sincere and repentent than even the last one, but nevertheless shows he is at least intellectually honest.
What I found still a bit disturbing is how he is diagnosing his problem: he believes that he has been systematically wrong in assessing the extent of the liquidity crisis, hence his bone-headed investment in AIG, Fraudie, WM, BS, Countrywide, etc.
IMO, investing is all about being wrong. Thre is nothing "wrong" about being wrong. It is what you do about it to correct your mistake. YMM happens to believe that when you are "wrong" (as in the stock price keeps going down after you buy it), you should keep averaging down -- THAT's YMM's key problem. NOT that he got the liquidity crisis wrong. If the liquidity crisis didn't happen, something else would have done YMM in with YMM's complete lack of risk control.
I'm going to create a post about that article but I have to disagree with your comment:
ReplyDelete"IMO, investing is all about being wrong. Thre is nothing "wrong" about being wrong. It is what you do about it to correct your mistake. YMM happens to believe that when you are "wrong" (as in the stock price keeps going down after you buy it), you should keep averaging down -- THAT's YMM's key problem. "
I think you are being very simplistic. You make it sound as if he averages down into anything that goes down. Clearly he has justification for believing something is undervalued and he only averages down into that. I mean, let's look at his tech stocks. He kept averaging down into Amazon but obviously he never averaged down into countless other leading technology companies who were declining rapidly at that time.
I think you have a trader mentality, which is fine because some hedge funds are successful with it, and I suspect you perceive averaging down as a poor strategy; whereas most contrarians and many value investors use it as one of their primary tactics.
On a somewhat related note, you also need to keep his individual actions in context of his overall portfolio strategy. Bill Miller swings for the fences. As he himself has said, he would be ok with several holdings going to zero if some others go up 10x. (In contrast, someone like Buffett does not want to take a single loss.) I think it makes sense to average down into losing positions if you are looking at getting a home run (assuming you are still confident with your analysis of the company.)