2008-03-19 21:56:50
Endeavor Capital Loses 27% In One Day
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According to the Financial Times, Endeavor Capital, a three billion dollar London-based hedge fund, lost more than a quarter of its value in one day. This drubbing occurred on Monday, the same day that Bear Stearns announced that it was being taken over by JPM for $2 per share.
According to the article, Endeavor Capital told its investors that it had lost 27% in one day due to a highly leveraged bet that went south. The bet was a "box trade" that involved betting on the spreads of 20-year Japanese government bonds widening while seven-year spreads narrowed. The financial crisis in the US cause this trade to go south, which forced Endeavor Capital to liquidate many of their positions in order to reduce their leverage.
The fund earned 11% for its shareholders last year and prided itself on generating "steady" returns for shareholders with "low volatility". Obviously these recent turn of events won't help very much when it comes to securing new capital in the future.
This just goes to illustrate the point that any fund is susceptible to a sharp drawdown at any time. You can never be lulled into a false sense of security, no matter how steady a company's track record seems to be. Any company that utilizes a tremendous amount of leverage is susceptible to a major drop at any time.
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