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Money managers under the microscope

Go for those nickels!

December 10, 2009

The hard lessons learnt from the credit crisis might suggest investors shouldn’t be trying to pick up the proverbial nickelsĀ on a railway track.

REUTERS/Luke MacGregor

REUTERS/Luke MacGregor

In a blog post in May I pointed to research by Yale academic Hongjun Yan that hedge fund managers are far more likely to choice so-called nickel strategies than so-called black-swan strategies.

(To recap, nickel strategies yield small returns most of the time with the occasional disaster, black swan strategies take years of small losses but hit the jackpot when rare events such as the credit crisis occur).

However, according to fund of hedge funds firms Culross Global Management, now is exactly the right time to leap onto the railway track and pick up all those nickels.

CEO Nigel Blanshard says it is ‘ludicrous’ that the firm’s Arbitrage fund, which invests in fixed income arb, convertible arb, mortgage arb, merger arb and other similar funds, is heading for a 2009 gain of around 14 percent, simply for helping markets work more efficiently.

Such strategies aim to profit from tiny inefficiencies in their chosen markets, but have to use a fair amount of leverage to make the gains attractive.

“The train’s just gone,” he said at a briefing in London’s West End today. “There’s only one every … five years. The probability of another train coming is extremely low.”

The ‘train’ in this metaphor, he argues, is a shock event, but he believes one is unlikely, even though some people argue equity markets have run too far.

“I don’t think people would be shocked if there was a reversal in markets,” he said.

I wonder what Mr Taleb might have to say about all of this…

(See also Nickels and black swans)


It looks like Culross Global should make their first call to New Stream Captial.They’ve got tons of dollars that turned into nickels.

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