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JWM Partners LLC - Relative Value Opportunity fund - relative value

2008-03-27

Count of distinct funds: 1
Capital base: $1B ($1.3B originally)
Loss: 24%

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stories: wsj.com, bloomberg.com

Original Writeup, 2008-03-19:

The WSJ has a story on Meriwether's woes, which notes:

Mr. Meriwether's recent troubles partly stem from borrowing. His bond fund had $14.90 in borrowed money for every $1 in equity at the end of February, according to the March 18 letter. Although far lower than at LTCM, the fund's risk level, which includes leverage, was still too much for this year's volatile environment, he and his fund managers have acknowledged in conversations with investors.

Mr. Meriwether marketed his bond fund as a lower-risk version of LTCM's core strategy, of identifying the next financial crisis and profiting from it by buying securities its managers consider underpriced. Investors were told that the firm would aim to keep borrowings below 15-to-1 even during less-volatile times. Mr. Meriwether and his colleagues promised to behave more conservatively, rebuilding their reputations with consistent returns. His bond fund hasn't had a money-losing year.

Unlike in 1998, Mr. Meriwether isn't a central player in the current crisis. His firm has about 70 employees, most working in LTCM's former offices in Greenwich, and some in London. Some LTCM investors invested in JWM when Mr. Meriwether started the new firm.

Sounds like some of these investors were just asking for it. The WSJ has additional data:

JWM's Relative Value bond fund, launched in December 1999, has lost 28% this year through last week after notching a 5.6% return in 2007, according to people familiar with the fund. The recent losses further weigh on the fund's average annualized return since inception of about 7% through February 2008. The Lehman Brothers U.S. Aggregate Index, a measure of investment-grade bond performance, has returned an annualized 6.5% during that period.

JWM's bond fund, which seeks to profit from price discrepancies among stocks, bonds and other securities, trails the 9% average annualized gain of hedge funds world-wide during that period, according to Hedge Fund Research, a Chicago research firm.

Moreover, Mr. Meriwether's five-year-old macro fund, JWM Global Macro, which invests in broad trends through currencies, commodities, stocks and bonds, was down 6% through February after falling 5.6% in 2007. The fund has gained about 5.7% per year, on average, since it began trading in 2003. That record means the macro fund, too, trails its peers, which have gained twice as much a year, on average, during the same period.

JWM's losses this year have pared the bond fund's assets to less than $1 billion from its peak of more than $1.3 billion, according to people familiar with the situation. The macro fund has shrunk by at least half, to about $350 million. JWM managed about $2.3 billion in total assets at the start of 2008.

The article states that Meriwether has been able to meet all margin calls thus far.

Original Writeup, 2008-03-19:

Bloomberg reports that

Meriwether's Relative Value Opportunity fund was hurt as bond managers such as Peloton Partners LLP and Carlyle Capital Corp. were forced to sell securities to meet margin calls, said the investors, who asked not to be identified because JWM doesn't publicly disclose returns. The Greenwich, Connecticut- based firm, which is selling holdings to reduce borrowings and lower risk, didn't have any loans called, they said.

``There's been a lot of forced de-leveraging,'' said Benjamin Sarly, head of marketing at Sanno Point Capital Management in New York, a relative-value credit fund.

The article states that fund has about $1B in capital but is down about 24% this year. Ouch.

For those not in the know, Meriwether was one of the principals in the Long Term Capital hedge fund, which imploded in 1998, requiring a Fed-orchestrated bailout. Meriwether subsequently won a lifetime achievement award, and as today's news makes clear, he was obviously not run out of the business.

Small wonder, then, that his "innovation" of massively-leveraged hedge funds which fail to truly account for systemic risks has become so popular. If this is failure, then its hard to see what doesn't amount to a personal success in the hedge fund industry. Heads, you win, tails, your investors lose (and you get lifetime achievement award, and repeat business).

That's it for our ranting. The Bloomberg article has more background on this type of fund:

Relative-value funds try to profit from price changes between related bonds. They rarely make outright bets that a specific bond will rise or fall. Investors in these funds expect to make about 1 percent a month.

Basically, fixed income arbitrage. Generally speaking this is the same sort of crap LCTM went down for (also in an un-anticipated environment of credit crunch, incidentally).

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Important: This fund is on our list of hedge funds that are apparently ailing or which we think are worth watching for any other reason. Ailing funds haven't shut down, but they've suffered significant value declines and/or temporarily halted redemptions. Funds on watch may not even have unusual declines, but may be posted if it is felt there may be risk of developing a more serious condition eventually.