Zero-Baseline Datapoint of the Day

The $9.3 billion Short Term Fund, offered as a place for schools and colleges to park their cash and get "returns slightly above U.S. Treasury bills", has now been frozen by its trustee, the stub of Wachovia (WB) which wasn't taken over by Citigroup (C). And it turns out not to have been particularly short-term after all: some of its investments won't mature until 2011, and investors can redeem only 33% of their holdings immediately.

The hit to investors won't be large:

The Short Term Fund is offered by Commonfund, a Wilton, Conn., nonprofit that advises colleges and schools on money management. Verne O. Sedlacek, Commonfund's chief executive, says 85% of the fund was in "high-quality" commercial paper from blue-chip issuers. The rest is largely in securities backed by assets like mortgages -- the kind of investments that are being especially shunned in the credit crisis. He estimates those are selling for about 89 cents on the dollar.

If you add that up, it comes to 98.35 cents on the dollar, before adding in any interest payments. The fund might have broken the buck on a mark-to-market basis, which would explain the three-year time frame for liquidating it, which clearly envisages holding securities to maturity rather than selling them. It seems that what's happened is that rather than giving investors back less than their original investment, the trustee has decided to simply wind down the fund altogether.

For me, this is yet another indication of how incredibly important the zero baseline is. The difference between a short-term fund gaining 1% and losing 1% is an order of magnitude greater than the difference between that same fund gaining 1% and gaining 3%. The latter is a question of performance, for a fund; the former is a matter of life and death.

I'd add that hedge funds have the same implicit zero baseline. People don't invest in hedge funds to outperform the S&P 500: hedge-funds are absolute-return vehicles, and if their returns are negative, that's guaranteed to result in substantial outflows, no matter what the stock market does. It's one of the problems with running a hedge fund: when times are good, your investors want you to outperform stocks. But when times are bad, they want you to outperform zero. It's a hard job, but then again you're being paid extremely well for trying to reconcile the dual benchmark.

Comments

[Ishortyou:]

in regards to Wachovia Wachovia got rid off the prior toxic risky wasted bank subsidiaries and kept the good ones. Now it can start from scratch to build a new banking subsidiary with safe practice together with its remaining good outstanding subsidiaries. The current subsidiaries of Wachovia make it look like “Merrill Lynch without the toxic risky waste”, good job from management it separated the good bank from the bad bank overnight, plus its CEO Bob Steel is one of the top rated mutual fund managers. Wachovia will keep the valuable human resources and the talent that have expirience in the banking business saving them for the new banking subsidiary. Buying the municipal bonds or the auction rate securities will give the inflow of cash as long as its hold even to maturity. Some investors are taking money away from Hedge Funds going wild and putting that money into accounts manage by people that know what they are doing, Bob Steel is one of those people that know what they are doing, dont be surprise some of this money will go to Wachovia subsidiaries. Earnings will be adjusted accordingly, like simple arithmetics they will manage its expenses vs its earnings to come ahead in capital and start piling up cash (saving cash a hard job for most of us that live on debt), this new cash will give them the jump start of a new banking subsidiary without even thinking about to sell its remaining subsidiaries.Forgot to mention that Wachovia owns a hudge Insurance subsidiary which is making money and has sound book of business. Lehman debt is bonds most of them senior, as bankrupt as Lehman is those bonds get paid. ARS are Municipal Bonds as bonds they get paid, hold into maturity they get paid in principal, those ARS are cash flow. Preferred dividends will get paid accordingly because the holding company does not own the banking subsidiaries anymore so modification are going to be made. Getting rid off the toxic waste risky bank related subsidiaries is a good strategy and converting the remaining broker one to a new bank subsidiary with clean sheets is a good one too.

2008 Oct 02 12:55 PM

[ILongyou:]

This IShortyou 'investor' seems to be hurting much from the Wachovia stock collapse.... I have seen this exact same post cut-pasted on dozens of websites, forums and discussion boards. Its almost like he trying to spam his way back to profitability :) Its really funny... the desperation and denial that the game is almost over... and its not him that won. Pseudo-psychoanalysis: He probably also finds it VERY difficult to deal with losing in real life... and probably looks for everyone else to blame for his own failure.. hehehe

2008 Oct 02 03:34 PM