How to speak hedge fund.

Commentary about business and finance.
Aug. 14 2007 4:16 PM

How To Speak Hedgie

What hedge-fund managers mean when they talk about challenges.

Bear Stearns CEO James Cayne. Click image to expand.
Bear Stearns CEO James Cayne

In these days of market volatility, hedge-fund managers and executives at all types of money management firms have been forced to explain why their funds are shutting down, losing money hand over fist, and freezing investors' funds. When they do so, however, they frequently lapse into a strange euphemistic dialect. And so we thought it would be helpful to provide a handy Hedgie-English glossary.

Hedge-Fund Phrase:Challenging
Translation: Run for the hills!


Hedge-fund managers never piss away money. They just face challenges. "We sincerely appreciate your patience and understanding during this challenging period," Jeffrey Larson, founder of Sowood Capital, told investors last month, as he explained why the $3 billion hedge fund, having lost half its capital, was selling off its remaining positions and closing up shop. As two of its large hedge funds that invested in mortgage-backed securities were going down, Bear Stearns CEO James Cayne told investors that "the sub-prime mortgage market has been challenging for a number of months." More recently, Monday's Wall Street Journal quoted giant asset manager Barclays as saying that performance in its 32 Capital Fund had been "challenging."

Hedge-Fund Phrase:Unprecedented, unique circumstances
Translation: Stuff happens. But we had no clue.

Anyone who read the best seller The Black Swanknows that random geopolitical, financial, and economic events can cause the prices of assets to move in ways that defy history and sophisticated computer models. But it comes as a shock to the brightest minds on Wall Street, especially those who run quantitative-based funds. "Wednesday is the type of day people will remember in quant-land for a very long time," Matthew Rothman, head of quantitative equity strategies for Lehman Brothers told the Wall Street Journal last week. "Events that models only predicted would happen once in 10,000 years happened every day for three days." Strangely, these same models failed to predict the once-in-10,000-year events that roiled the markets in 1997, 1998, 2001, and 2002.

Hedge-Fund Phrase:Market volatility has produced unfair, unrealistic prices.
Translation: The market is efficient only when it works in our favor.

Several money managers blamed their temporary problems on investors' irrational collective behavior. "Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade," said Sentinel Management, which sought to halt redemptions of some of its funds this week. And such conditions make it "virtually impossible to properly price securities or to trade them." Goldman Sachs CFO David Viniar noted that the firm's decision to inject $2 billion into its ailing Global Equity Opportunities fund "reflects our collective belief that the value of this fund is suffering from a market dislocation that does not reflect the fundamental value of the fund's positions." In other words, the losses shown by these funds isn't the fault of the managers, it's the fault of a market that just won't value assets properly. Ironically, you never hear fund managers say that their gains have been unwarrantedly large due to the market's failure to reflect stocks' fundamental value.

Hedge-Fund Phrase:Our results were affected by the selling behavior of other firms.
Translation: We made the same dumb trades as everyone else.

"We have been caught in what appears to be a large wave of de-leveraging on the part of quantitative long/short hedge funds,'' James Simons of Renaissance Technologies said in a letter to investors last week, which sought to explain losses in his highly regarded hedge fund. He also noted that the methodology used by his fund was "undoubtedly shared by a number of long/short hedge funds." Goldman Sachs similarly blamed other funds' behavior for its own losses.Of course, the premise of high-end money management is that you don't simply mimic the same investment strategy of 30 other hedge funds. That why Simons was paid $1.7 billion in 2006  (article purchase required).

Hedge-Fund Phrase:We just want to protect investors.
Translation: We just want to cover our butts.

Declining performance frequently leads investors to withdraw their funds, which can, in turn, force hedge funds to sell securities to raise cash. To forestall the ensuing death spiral, funds sometimes lock the door. French bank BNP Paribas last week froze redemptions of three funds that held mortgage-backed securities. BNP said it was limiting the liberté of its investors for the sake of protecting the Gallic virtues of égalité and fraternité. Locking up the funds temporarily is the best way "to protect the interests and ensure the equal treatment of our investors." Sentinel used the classic American trope of aligning the interests of the owners with those of the shareholders. "We don't believe it is in anyone's best interest if a run on Sentinel took place and we were in a forced liquidation mode."

Hedge-Fund Phrase:This isn't a rescue.
Translation: THIS IS TOTALLY A RESCUE!!!!!!!

Goldman Sachs' GEO fund lost 30 percent of its value in a week and was leveraged at a rate of 6-to-1. But to hear Goldman tell it, the cratering of its own fund simply presented an irresistible buying opportunity. "We are investing not because we have to, but because we want to," said Viniar during a conference call. At another point, he noted: "No, let me just clarify. This is not a rescue." And if you believe that, I've got some subprime debt I'd like to sell you.

Send your own entires to the Hedgie-English glossary to


Sports Nut

Grandmaster Clash

One of the most amazing feats in chess history just happened, and no one noticed.

The Extraordinary Amicus Brief That Attempts to Explain the Wu-Tang Clan to the Supreme Court Justices

Amazon Is Officially a Gadget Company. Here Are Its Six New Devices.

Uh-Oh. The World’s Oceans Have Broken Their All-Time Heat Record.

The NFL Explains How It Sees “the Role of the Female”

Future Tense

Amazon Is Now a Gadget Company


How to Order Chinese Food

First, stop thinking of it as “Chinese food.”

The NFL Should Lose Its Tax-Exempt Status, Which It Never Should Have Had Anyway

The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant

The XX Factor
Sept. 18 2014 11:40 AM The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant
Sept. 17 2014 5:10 PM The Most Awkward Scenario in Which a Man Can Hold a Door for a Woman
  News & Politics
Sept. 18 2014 6:52 PM Ground Zero for the Fight Over Female Voters  Colorado Democrats and Republicans are testing theories for reaching women that will resonate far beyond the Rocky Mountains.  
Sept. 18 2014 6:02 PM A Chinese Company Just Announced the Biggest IPO in U.S. History
Sept. 18 2014 4:15 PM Reactions to a Sketch of Chelsea Manning Reveal Transmisogyny
  Double X
Sept. 18 2014 8:07 PM Crying Rape False rape accusations exist, and they are a serious problem.
  Slate Plus
Behind the Scenes
Sept. 18 2014 1:23 PM “It’s Not Every Day That You Can Beat the World Champion” An exclusive interview with chess grandmaster Fabiano Caruana.
Brow Beat
Sept. 18 2014 4:33 PM The Top 5 Dadsplaining Moments From The Cosby Show
Future Tense
Sept. 18 2014 6:48 PM By 2100 the World's Population Could Be 11 Billion
  Health & Science
Sept. 18 2014 3:35 PM Do People Still Die of Rabies? And how do you know if an animal is rabid?
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.