Amit Chokshi_

Are Hedge Funds a Risk to the System? The Proof is in the Provenge

Right, I realize that and many funds were forced to cover but again, how does that speak to arrogance. Tom Brown and David Einhorn had good portions of their portfolios in companies like New Century and are likely underperforming due to these positions (Einhorn I believe was on the board of New Century so it made his predicament even more difficult). These two guys are phenomenal investors that run hedge funds and stocks like New Cent immediately traded down on days when bad news was released. Would you call them arrogant or reserve those comments soley for funds that short rather than go long?

Also, while I'm not familiar with the short interest build up in DNDN, do you believe the majority of funds shorted at the low and not in the $5-$8 range and a good portion of the short float was just funds rolling over their exposure in advance of the news? DNDN was a binary play and I think any fund manager on the long or short side recognized that, it was either a 0 or a 5x return event, so if you lose on either side you'd be in trouble. But you're also talking about a microcap biotech, even at its current valuation, so to expound on this being some sort of catastrophic event for fund managers is extreme in my view.

Are Hedge Funds a Risk to the System? The Proof is in the Provenge

Hedge funds are arrogant because they shorted DNDN? What kind of prime broker will let a fund manager ride out a $4 short up to $20+ or wherever it hit during that phase? Most funds that were short would have gotten out or forced to buy back much earlier. DNDN is hard to locate as well so it's even that much harder to maintain the overall short without addiitonal margin. Also, are there any indications of hedge funds that bet the house on shorting DNDN? I don't think there are so if you run a long/short and are short DNDN with maybe 1%-2% of your portfolio, sure it's painful but you're not first of all riding a short from $4 to $20+ and secondly, other positions should have mitigated the loss.

As for arrogance, whether you're long or short any stock I'd imagine most funds conduct some due diligence before initiating a position. Also, some of the best value investors (Buffett, Pabrai, Greenblatt, etc) have had over 30% of their portfolios represented by just one position at times. The determination of whether these types are arrogant or made a smart bet is all based on the outcome. If the investment works well, ex ante it might look arrogant but ex post it makes them look like geniuses that stood by their convictions and had the right analysis to back those positions. I can bet a guy like Jim Chanos probably gets lashed the most in terms of arrogance due to the duration of his ideas mismatched with short-term expectations. His short on LeapFrog might have been arrogant cause it went up quite a bit and he kept shorting and then, now, on an ex post basis he's once again vindicated.