Hedger

Latitude - Fixed Income gone bad?!

Background

Latitude was one of the more recent hedge fund fiascos, when it was closed down in late August 2006, following a period of relatively bad performance.

The fund can be described as a macro fund with a special focus on fixed income trading, and in the end, it is rumored that it was a (huge) bet on short rates in UK that brought the fund down. The fund lost some 22% in 2006 and this was apparently to much for both B&P as well as the for the fund managers.

The fund was setup by ex ABB-treasury veterans with a (unconfirmed) excellent track record there. When ABB closed down their trading activities, the team went solo and started up their own fund. The track record up until July 2005 is pretty strong, but apparently both the asset growth and trades seems to have made life somewhat to difficult for the management team.

Strategy

Sourcing from various articles, presentations etc., the fund resembled a traditional prop desk, where each individual where given a separate risk budget and was relatively free to take positions. These types of hedge fund ordinary works with a stop-loss per portfolio manager, so did Latitude.

Judging by the last month of Latitudes track-records, it does indeed appears as if the stop-loss kicked in. Returns after the loss in March 2006 with a negative 8% result, became gradually smaller and smaller, all on the negative side. This may indicate that the individual portfolio managers were forced to close out positions and market risk. Given the fact the most portfolio manager probably were stopped out, or close to stops, the fund would not be able to any significant amount of market risk and it would definitively end up in the bottom of the Swedish hedge fund performance league.

How Latitude was actually managed in the final months will probably remain a secret, but as the saying goes, "when in trouble, double".

Results

The picture above shows the total accumulated profit and loss for Latitude (this is calculated by multiplying the monthly change with the net asset value for the previous month). Here we note that the total accumulated profit is around 100 million USD.

While the average investor experience was a negative one, it may have been a totally different experience for the fund managers, that could potentially have clipped some 20% of the new profits every quarter. Given the high in profits of 400 million USD, this indicate a profit potential for the fund company of some 80 million USD.

Summary