Big Hedge Fund Whacked - And Warm Feelings

Bruce Krasting's picture


One of the biggest leveraged hedge funds in the world got hit with a 2x4 during the 4th Q. This fund has a mixed bag of assets, but was heavily exposed to big FX positions.


The fund made a big “bet” recently when they went short EURYEN. This turned sour in a very big way; the EURYEN moved an incredible 14 big figures against them in just 60 trading days.

Street players, who know of this currency spec, refer to it as a “Size” position. At the end of Q3, it came to a lumpy short $40B. There were rumors that the fund added to the short during the Q (not confirmed yet). But even if the book was kept static, the mark-to-market loss comes to $5+B. That’s serious money to anyone.


Note: The short EURYEN book is looking terrible for this fund. The new Japanese Prime Minister is forcing a devaluation of the currency. The Japanese Central Bank is doing its best to achieve that devaluation. It’s possible that the fund will have to cover the short. If so, it could turn that “paper” loss into a cash loss.

I think the well-paid managers of the fund are kicking themselves in the ass over this speculation. They got creamed on this stinker, and this could be just the beginning of the losses.



Adding to the carnage was a monster sized bet short EURUSD. Last reported, this mega-position was $220B short! It’s possible that this number is now close to one-quarter trillion. It was a good Q for the EURUSD, and that means a bad Q for the fund. The 6+ big figure move up in the Euro versus the dollar translates into a paper loss of a staggering $11b!


All in, the losses from FX come to $16.5B. The fund has reserves of about $50b, so the quarterly swing is not a crisis, but it’s an eye-opener. 30+% of those reserves went out the window in one Q. Wow!


The fund in question has a strong capital base and loyal investors. But the management will have to explain to those investors how it managed to lose such a large percentage of its “cushion” in such a short period of time. Those investors will, no doubt, ask the very pertinent question: “Why is the fund making such big FX bets?”


Management is also going to have to address the issue of leverage – this fund is now running at 10 to 1. The high level of leverage, and the mega billions involved (much of which is tied up in derivatives), makes this fund a high risk/return player. Investors will have to ask themselves, “Do we still want to be on this roller coaster?”



So who is it that is running such a big FX book? And who are the investors that are on such a wild ride?


That would be the Swiss National Bank. The “investors” are the Swiss people.




I know, I know. Central Banks aren’t hedge funds, and they can’t take losses because they can always print more money. I respond to this by saying that the SNB is acting very much like a leveraged hedge fund. It's making currency “bets” with the people’s money. It's taking some very big risks. In an attempt to diversify one risk, they are just adding different risks, and that effort is backfiring.


Like the US Fed, the SNB sends its annual profits back to the people (Treasury in USA, Cantons in Switzerland). The book losses at the SNB will reduce the amount of the payouts to the Cantons, so the losses will be felt.


Switzerland is a small country with a GDP of about $600B. If the FX losses at the SNB were applied to the US economy, it would translate into a half-trillion dollar loss. That would be a very big deal indeed. The FX losses since September come to $2,000 for each and every Swiss citizen. The word “Shellacking” comes to mind.



I bring up this story to make a point. (Don't worry about the SNB) What happened at the SNB is because the SNB absorbed risk from the Swiss economy (the currency peg). As the SNB absorbs risk, it will, by definition, have to take losses from time to time.


The SNB has absorbed currency risk; other central banks have taken credit, liquidity and duration risk out of their respective markets. In the aggregate, the risk transfers have been massive. That’s why the global capital markets are so “calm”.



To me, the private sector looks “okay” for the time being. It’s the Public Sector that has the potential to produce a black swan over the next year or so. I conclude that the “confidence” factor is going to be an issue. The questions hanging in the air include, “Are all these governments really money-good?" "Are the key governments and their leaders able to maintain confidence in this fragile system?" "Are 'they' going to do the 'right' things?"


The world’s largest economy has just set itself up for a crisis in 60 days. China Inc. is sitting on a gazillion of dodgy loans. Japan Inc. is in hock up to its eyeballs (and is in the process of slow motion devaluation). The EU will, this year, be forced to make good on its promise of “Unlimited” printing. Where's the confidence in that pile?


This confidence “thing” is hard to anticipate. It comes and goes quickly. The year is starting out with a fairly high level of “warm feelings”. I’m not at all convinced that those feelings are justified. The list of things that could trip up the Public Sectors, and their deciders, is too long.





Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
linrom's picture

This is a very well written and informative article.

humblepie's picture

Happy New Year Bruce! Thanks again for putting things BACK into perspective. It's so easy to get blindsided these days.

DeficitAlchemist's picture

I hope the fund has deep pockets I called more than a year ago for the Yen to bounce from 76 lows to 89 to the USDJPY... another 2.3% odd, which with a relatively stronger Euro for now could be a further 3-5% on EURJPY upside.

Its a 3 times observed 61.8% Fibo pullback on the weekly chart.

3% is a vast move when the leverage is such and already deep in the hole. Squeeky Bum time.

DeficitAlchemist's picture

I hope the fund has deep pockets I called more than a year ago for the Yen to bounce from 76 lows to 89 to the USDJPY... another 2.3% odd, which with a relatively stronger Euro for now could be a further 3-5% on EURJPY upside.

Its a 3 times observed 61.8% Fibo pullback on the weekly chart.

3% is a vast move when the leverage is such and already deep in the hole. Squeeky Bum time.

falak pema's picture

This analysis of Jap Yen and USD shorting against Euro has hurt a lot of FX players who did not see this resiliency trend of Euro and bought into the "Nigel Porridge" view that Euro would be dodo by year end 2012; aka the Greek Tragedy unwinding fast to all Eurozone. The Draghi magical machine stopped that provisionally...

Our FX expert here on ZH, Yen Cross , went on about this as well. 

Just goes to show what a manipulated CB market this is; now that the currency war has exposed Japan and also America's fragility, as epitomised by the Fiscal cliff political caper. It really is a criminally dumb race to bottom in first world. Not saying that the EUro caper is any better off, far from it! Its all the same show behind the curtain.

And this current fiscal cliff compromise bodes well for the demise of effective congressional power to right the ship of state of USA in this second incumbency period of same POtus; now clearly a man divided between the AMerican Charybdis of runaway governmant war/entitlement spending (no cuts there in his current program) and the ongoing Scylla of Oligarchy mayhem with FED megaprinting and WS asset levitation to maintain P/E >25 for US assets. As a global margin squeeze in a doldrum economy on all fronts arrives like a cat wearing seven league boots on the rebound. (It nice to see AEP predicting the contrary in Telegraph, where he presents the ongoing Fiat hopium rise to S&P to 1650 in 2013!). Newton's action and reaction...

The PAx Americana model is breached bigtime on BOTH fronts. 

All the while the structural financial asymmetry of First WOrld to BRIC/OIL oligarchy world continues to INCREASE exponentially, as we pile up debt on debt; calling it "assets", and deficit on deficit; calling it maintaining the Macro GDP growth curve of  globalised world on level keel, like it were the ship of Captain Barbossa on a Conquistador "steal the treasures of the Montezuma"  rampage!  

Smoke n mirrors, the current corrupt Oligarchy living off the wealth of retirees and future generations! 

Ghordius's picture

poor, poor hedge fund managers. I mean they do have to do something with the humungus leverage money the big banks give them (never mind the fact that for all purposes it will be tax-payers' money, at the end)

and they do have to go long something and short something else - they do have to bet while being perceived as being hedged

if they win, they win. If they lose, they lose very little (and have a seriously good life while betting) and someone else pays the bill

but of course pointing out that the hero hedge fund managers are just favourite sons of this managerial setup is a kind of heresy for some


LOL, "Nigel Porridge" view indeed - I hope that poor Nigel does not have to witness the death of the British Pound, it would break his heart after carrying so often a coffin with the  EUR sign on it in the streets of Brussels...

Itch's picture

I just dipped my toe in on the short side of EUR/YEN, its cheap from a positioning point of view as we speak; someone just took it way up to 116 from 114 in the space of 2 hours (couild have been the SNB throwing in the towel). I figure that could be the final flush before a decent retracement, thats the thinking anyway. If we get a good run down i'll close half for evens and let the rest run, hopefully for a few months. Lets face it, not a saussage has changed in Japan, their hands are as tied as they ever were...does the market wake up tomorow and realise this? Here's hoping they do.

booboo's picture

Kashya Hildebrand has been a busy little beaver. 

WTFUD's picture

If i had the wings of an eagle and if i had the arse of a crow i would fly overhead tomorrow and shite on the bastards below.

FedRes ( aka JPM & Co & Friends) BOJ ECB BOE SNB

Arthur's picture

Correct me if I am wrong.  

The Swiss are not making a bet, they don't want their money "overvalued" vs. the yen or anyother instrument.  

Currency wars baby.  Lower currency value - to  a point, is good for the economy as it increases the relative value of a countries exports.

There is going to be a lot of push back as Japan tries to devalue the Yen and the rest of the world tries to neutralize the effect on their own economies.  

Wish I knew how to play the coming battles.


akak's picture

Bullshit pure and simple, Arthur.

Do you even stop to think about the nonsense you are spouting?  "Lower currency value ... is good for the economy as it increases the relative value of a country's exports".  I would laugh at this crap if so many people did not actually take it seriously!

Where does this ridiculous and disingenuous neo-mercantilist notion come from that the only thing that matters, that the only thing that currency depreciation MIGHT influence (possibly for the better, but purely in the short run, of course) is exports?  What about a nation's IMPORTS --- not so beneficial in THAT case!  And what about the very real losses to savers and investors caused by (fiat) currency depreciation --- care to comment on that?  Not to mention the economic malinvestments and net societal economic losses that currency depreciation inevitably produces.  Care to address any of THOSE issues, Arthur?

If currency depreciation were so "good" for an economy, 1980s Latin America, and 2000s Zimbabwe, would have been economic powerhouses, instead of the economic basket cases that rampant and repeated fiat currency depreciation made them.

Get your hopelessly corrupted Keynesian head out of your ass, Arthur, and try thinking with it.

falak pema's picture

De Gaulle devalued the French franc in 1958, but created a dynamic exporting model that fueled the french revival for 10 years to the point where its demands for repayment of its excess USD paper reserves in gold helped cause the Nixonian decision of BW revoke of 1971. So competitive devaluation can work.If there is a game plan, it can help.

Japan Inc is another example during that period.

Having said that in De Gaulle's days energy was cheap thanks to the Seven Sister Oligarchy that had a model of buying/producing oil at COST both home and abroad and making their profits in VALUE added downstream operations, (refining/petrochemicals). That model died concomittantly under the duress of peak US oil and Fiat printing w/o gold back up, from 1973 onwards, when the Oil oligarchy of Arab world took over  the true excessive riches of western world's fiat/debt fed growth model, now going global bigtime, like a careening Oligarchical cabal bent on crime. 

We are still basically in that model, made into US based supply side fortress since 1981,  with a lot of financialista sauce fed on derivative steroids and ramp up of 1% wealth pyramid thanks to cheap labour outsourcing. The Oligarchy rules! 

Now the whole issue is NOT mercantilist or protectionist; its first and foremost avoiding the financialista shit storm from destroying the current capitalist world and then making the real economy center stage on a non hegemonial basis; in a world of LIMITED RM, galloping population growth and ecological challenges that will make the Dinosaurs shiver in their skeletons, as they remember the last time this happened.

A whole new model needs to be created. 

Arthur's picture

"Lower currency value - to  a point, is good for the economy"   Not saying there is not a fine line but, within limits, currency "adjustments" can have a net benefit, certainly so in the short term.

By the way Latin America and Zimbabwe had hyper inflation.  Which is a bit different then a marginal devaluation of a currency.

So my questions to you, AKAK, are:  

1) So exactly what/why is Japen trying to devalue the Yen?

2) If the Yen drop's 20% in value to all world currencies, will Japan be better off?

akak's picture


So my questions to you, AKAK, are:  

1) So exactly what/why is Japen trying to devalue the Yen?

2) If the Yen drop's 20% in value to all world currencies, will Japan be better off?

1)  Because they are ruled, as is the USA and almost every other nation, by a combination of self-serving and short-sighted politicians willing to fuck their economy for the benefit of themselves and their favored cronies, clueless Keynesian eggheads, and/or criminal sociopaths (with significant overlap between each said class);

2) "Japan" meaning what exactly?  Japanese politicians?  The average Japanese citizen?  Japanese exporters?  The overall Japanese economy?   If you want to make the broadest possible case, then logic (which you seem to lack) undeniably indicates "No!", for all of the reasons that I gave above, plus many others.  Competive "beggar they neighbor" currency devaluation in the vain hope of spurring exports (while punishing imports, savers, and investment) is nothing but an insane and self-defeating monetary circle-jerk, as history has demonstrated many times in the last century, the benighted Age of Fiat.

For the last fucking time, you stupid and malevolent Keynesian asswipes, THE UNWARRANTED PRINTING MONEY DOES NOT CREATE WEALTH!  IT DESTROYS WEALTH!

Notarocketscientist's picture

You are wrong.  A weaker (NOT collapsing) yen has nothing to do with cronies or keynes.,

Japan wants a weaker yen because a strong yen has caused their export industries to crash and burn.  Where have you been the last year - with the Yen at 80 to the USD Japan has been getting hammered.

Of course they don't the yen to go Zimbabwe ....  but they definitely want a weaker currency.

akak's picture

Again with the idiotic, blinkered and short-sighted focus on exports, like some damned 17th century mercantilist. 

Why the Hell can't you Keynesian dipshits ever recognize anything other than exports, exports, exports?  NO economy consists solely or even largely of exports!  OK, maybe your suicidal currency depreciationary policies will boost exports (in the short run, ONLY in the short run) --- then what?  And again, you dishonest and duplicitous bastards, what about IMPORTS?  What about SAVERS, who are punished if not ruined by your inflationary policies?  What about INVESTMENT, which is hamstrung and misdirected by those same self-defeating policies?  And why NEVER the recognition that EVERY OTHER FUCKING GOVERNMENT is going to attempt to follow the SAME suicidal policies, defeating your own?  Nor the recognition that such "beggar thy neighbor" mercantilist policies have NEVER worked to the overall benefit of ANY nation following them, but only resulted in international penury (as in the 1930s) instead?

God, you malicious Keynesian monsters are utterly insane!

Arthur's picture

Who said anything about printing money?

Currency can be devalued without printing.  Heck the Chinese have been doing a nice job of manipulating their currency without massively printing of the rmb.

I am more Austrian than Keynsian and think the Fed policy of printing money is stupidly out of control.  Sooner or later there will be a price to pay.  That does not mean currency manipulation is not without use.  And of course that means short term winners and losers in a given economy.

I think for now China has been a clear winner vs. the west by keeping its currency artificially low.  Are individual Chinese getting abused? Sure but is China as a whole better off, I  say yes.

urwright's picture



CUNTs everywhwere (cant understand normal thinking)

they are a virus preying on something for nuthin 

steve from virginia's picture




Depreciated yen cuts both ways as Japan must import all of its inputs including petroleum. It can pay with yen ... so far.


The BoJ might get what it wishes for ... the oil sheiks won't accept the yen, the Japanese will have to buy dollars in order to buy fuel like the French and Italians had to do before the euro.


What Japan might gain in export trade is much less than it will lose by paying more for imports.


Japan's problem is its major products don't make its customers more prosperous, instead just the opposite. Japan's 'goods' tend to be useless junk that costs a fortune and is thrown away after a few years (they do make nice cameras). The Japanese have bankrupted themselves on purpose. Trying to reduce the worth of their currency is the last gasp, rear guard action ... the grasping at straws by the dying.


All the other countries with their central bank manipulation and easy credit are in the same boat ... one step from oblivion.


In currency wars there are casualties ... risks accumulate where they aren't obvious.

hooligan2009's picture

amen brother +1 brazillion

steve from virginia's picture


Yes, a very interesting game ... when the clients of the hedge funds want to redeem their investments they simply go to their bank(s) and take their money out ...


It's most interesting when they all do it at the same time.




DYS's picture

The questions hanging in the air include, “Are all these governments really money-good?" "Are the key governments and their leaders able to maintain confidence in this fragile system?" "Are 'they' going to do the 'right' things?"

These questions mean nothing.  No wonder you're so confused.  Define money good.   Define confidence.   Use metrics.  Be specific.  This is worthless babble.

Bohm Squad's picture

Here you go:





And for your "worthless babble" comment, might I suggest this eye-opener:  Cynicism


Rustysilver's picture

Why would SNB be allowed to do something as stupid as this.  Let me see: Japan is a string of some islands. They have earth quakes every year. They have proven that their nuclear power plant are the safest in the world. Their neighbors are very friendly (NK being an outlier).  So, yes I want to make a large bet.

Clint Liquor's picture


Why would SNB be allowed to do something as stupid as this?

They are the 'elite'.

They are the Central Planners.

They are smarter than all the Peasants.

They worked for Goldman Sachs.

They were awarded Nobel Prizes for nothing.

They are not accountable for their mistakes.

You are.

hooligan2009's picture

all this pegging seems pretty pointless..why not just print the money to their friends (banks) then beg for it back later..seems to be working well in Japan, the US and Europe


e2thex's picture


                   Nicholas "Nick" Leeson

Great Post; Happy New Year

Freddie's picture

Damn. I was hoping the mystery losing hedge fund was SAC and Stevie Cohen with the Russian gangsters looking for him. 

Cpl Hicks's picture

Now that's funny!

I got a mental picture of a large, dark mansion in Connecticut; a pale, sweating man trying to protect himself with a squishy pickled shark while the cold-eyed Russian picks himself off the wet floor while trying to find his piece amongst the shards of plexiglass.

Irelevant's picture

Bruce, it does not matter, its paper traded for paper. Its all Monopoly money. We dont see it as such, but they do, they know its all smoke and mirrors.

Clint Liquor's picture

Are 'they' going to do the 'right' things?"

Central Planners can always be counted on to be arrogant and stupid. It is their nature. It comes from being the 'elite', not unlike the inbred Monarchies of the past.

H E D G E H O G's picture

Thanks Bruce, WE appreciate it as always. I believe it's called the "Confidence Game", and our so called government is nearing a vote on their latest SCAM! 

WhiteNight123129's picture

And since the currencies we use are government creations, if Governments have issues bonds and currencies are first in line evidently.


bank guy in Brussels's picture

Bruce, here's a little Swiss-inspired yodeling that will be very emotional for some Americans

And it's still now within the 12 days of Christmas, till 6 January, so it's still timely

Maybe you know it too, it's a favourite middle-America child's Christmas video created in the 1950s, 'Hardrock, Coco and Joe' that apparently was very popular on American television for your generation

Our Brussels refugee from the USA lived in Chicago where it was most often broadcast, and introduced me to it ... Now I have some Belgian children singing along with it ...

Lovely piece about Santa's three special elves who accompany him, including one elf who does nothing useful but Santa loves him anyway ... brilliantly sung a capella, and with yodelling in the chorus

From America's 'Broadcast Museum' ... utterly charming, hope it brings you some memories

Manthong's picture

Thanks, I remember them and the kid’s show they mostly aired on (Garfield Goose) ..  Here’s  another a capella from the same era, area, production company and singers.

About those three dwarfs, though.. I hear that now they are on the staff of Mayor Romberg Rabbit of Chicago trying to figure out how the City with the strongest and most oppressive gun laws in America can have the highest gun murder rate.  :-)

philipat's picture

Great piece except for borrowing from semi-literate Bush English. It's a "Decision maker" in real English.

Bruce Krasting's picture

I hate "real" english. I would like to have only run-on sentences. Lots of commas, so the reader would think, maybe, that this was a person talking, not just words on a page.

But my editor makes fun of me when I do that.

Anyway, I always loved that "Decider" line by Bush. I mean, how can you get more arrogant than that?

disabledvet's picture

arrogant? you show your IGNORANCE when you say something like this. In Government "no decisions are made." That is NORMATIVE. When W says "i'm the decider" that's a person taking RESPONSIBILITY for his actions. Trust me..."that ain't arrogance." and according to the Lefties "that's just stupid" cuz "now we're going to blame you for everything." And you could very easily see the difference in just the next 60 days. All spending bill originate in Congress. So assume for a moment that the expiring one does pass the Senate Bill. Fine as far as taxes are concerned...but that ain't the meat and potatoes of Goobermint. Leaving aside the fact that this Administration has not ONCE posted a budget for Congress to act on ...the Agencies that actually "function" have to have their monies for the whole year lined up in under sixty days. That's when Congress declares "pay as you go day" because that's when the Debt Ceiling is officially breached and the only money available is the cash on hand to pay for things. Wall Street will still function because of QE et al. But you could have entire Federal Departments simply "laying off everyone" due to lack of funding! And that's not Congresses fault but the PRESIDENT'S for not stating what those funding needs were to begin with. How is Congress to know that? That includes funding a War! if you thought those Repo 109 things at Lehman were a big deal...wait 'till you see what Government is hiding when it comes to money....

vato poco's picture

You may have a point there. Would MUCH rather see/hear a pol stand up & say "I'm the decider" - thus implicitly accepting responsibility for whatever choices/actions are taken - than to hear some whiny pussy moan "It's all that _other_ motherfucker's fault! You know, the one from 5-10 years ago!! *I'm* just the victim here, same as y'all!"

akak's picture

Funny you say that, Bruce (and as non-native speaker of English to boot), as I have noticed a deplorable English-language campaign against almost ANY use of commas over the past decade or so, inevitably resulting in either incessant streams of ambiguous run-on sentences, or else chopped-up and simplistic sentences that reek of baby-talk. 
And don't even TRY slipping in a semi-colon; that is VERBOTEN according to the dumb-downed, sound-bite-loving editors of today!

vato poco's picture

It's not just the 5-word sentences, and the 2-line graphs that are spreading like wildfire. ("Long sentences intimidate readers & make them lose interest!") Pick up any best-selling 'airport' novel today. Odds are, it'll have chapters that are 2, maybe 3 pages long - for the same reason. It seems an author who is unaccountably best-selling *coughJamesPattersoncough* stumbled on this formula awhile back, and all the big houses & style manuals now treat it as if it were gospel. Yeah, this'll end well.

illyia's picture

I tried to rec you up but it did not work so this will have to do.;;;;;;;;

Bruce Krasting's picture

I use 2 mabe 3 semi-colons in each one of these things.  I swear, I do it to piss off my editor, who is actually a pro.

Her telling me, again and again, that there is only one way to do things, and I don't do it that one way; and it makes me look, and read bad.

Dr. Sandi's picture

One problem with too much editing is loss of heart. Sometimes, people edited by the same editor come off all sounding alike. Something I had to be careful of in my editing days.

BTW, good editing is much easier than good writing. And yes, editors are a necessary evil.

Thank you for keeping the flow coming down the pipes!

TraderTimm's picture

Bruce, you read just fine.

I could give a flying shit if it is per the "style guidelines". Honestly, there's a whole legion of frame-straighteners out there who should just sign off the internet forever.