While this is not surprising given that energy stocks have been down and have contributed to losses in numerous hedge funds, the XTO position of $128 million in shares was the largest position for the Ospraie fund, and does once again highlight the problems with having a fund be too concentrated in just a few positions. Such a concentration can cause the types of losses Ospraie incurred, including a 26.7 percent loss in just one month (see previous article and previous post).
Fund manager Dwight Anderson was quoted as once saying that: "The fact that I had a horrible quarter is a statistical probability, and we had always told people there is that possibility.'' Yes, and when you are overweight a volatile stock in a volatile industry, you can expect that statistics will line up less and less on your side. In fact, this is a common problem in a portfolio when a certain position does well. Before long a hot stock can become a major portfolio position, and one that may now be larger than your portfolio guidelines allow.
Nonetheless, even though you are now overweight the position beyond allowable levels, and even though VaR measures are screaming at you, it is hard to scale back the a security that is outperforming and in a sector that is on a roll. That is until of course everything changes, and the industry or sector corrects dramatically, as we have seen with energy stocks.
Sure, these are unusual moves, but they are also precisely the types of moves you should be trying to protect yourself against. Anderson went on to say in an interview last year that: "We do everything that we can to manage the risk, and I think we're better at it today than we were a year ago.''
Apparently, everything was not enough, and everything did not include consistently updating VaR measures, or simple looking at portfolio weights. Scaling back risk is a difficult, but necessary part of any fund management, even if it involves giving up a little return in order to play another day.