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The Eifuku 'Eternal Luck' Fund blew up in early 2003 and it lost 98% of the investor's money in 7 trading days in normal market conditions.

There are several articles on the net regarding this rude-sounding name, however the best article is still the "Dear John" letter by the fund manager John Koonmen. I managed to find a link to a copy of the PDF file, here: http://www.nuclearphynance.com/User%20Files/389/invlett.pdf

Charlie Munger once said that while it's good to learn from our mistakes, it is probably better to learn from other people's mistake, so, what can we learn from this blow up, so that we won't make the same mistake ?

raytoei
(who hasn't posted for ages)
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Interesting post and good topic.

Let's see. What does he say he was doing before his fund ate flaming death?

1) Doesn't look like he was very diversified. Was this a hedge fund? Kind of sounds like one. That'd be the first warning sign right there. The U.S. hedge fund people best hope the iron fist of government never extends from either of my arms, in general, because I know the second place I'd swing that fist (once I finished ruining the lives of naked shorters in such a way that no sane person would ever voluntarily do it again) and I wouldn't hold back.

2) One of his positions was a large short, and his equation of relative values was predicated on the values remaining the same. Which is like with Penn Square, where the bank lent to drillers who put up rigs and leases as collateral. If energy goes down, those lose value, and your collateral becomes collateral damage.

3) He was dumpster diving. Which is fine as long as you don't do it with too much of the money.

4) If I understand correctly, these losses of '15% of capital' mean, roughly translated, that investors backed up the truck and disgorged a bunch of shares--repeatedly. After three days of that, the margin requirements hit. That's either a lot of people wanting out, or a few very heavy investors wanting out; he doesn't say which.

5) Evidently he was out on margin, because I don't know of a way to get margin calls unless you're out on margin. There could be something I don't know, of course. But maybe that means that sending your money to someone who isn't well diversified and is out on margin is going out on quite a limb.

6) Some of his stuff wasn't very liquid. No one needs to explain to this audience why that's a problem.

Summary: sounds like the guy was essentially a market wildcatter. Big risk, big potential reward. I hope he had a very high minimum investment, so that only people with vast piles of money (who probably had lots more and thus weren't utterly ruined) ended up crowding the lifeboats of this particular investing Titanic.
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Hi ray,


Charlie Munger once said that while it's good to learn from our mistakes, it is probably better to learn from other people's mistake, so, what can we learn from this blow up, so that we won't make the same mistake ?


The letter is a bit sketchy on details but I think the most important take away is to only use margin very, very carefully. For us weekend investors, perhaps, it's don't use margin ever.

I'd like to know what the funds leverage ratio was before January. It had to be in excess of 2:1 for a 45% or 46% drop in fund value to nearly wipe out the fund.

Rich (who never uses margin)
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There's a short write-up on Eifuku in "Fortune's Formula."



1. positions of 1.4 billion backed by 155 million of asset value (9 times leverage).

2. only three 3 major positions

a) long 500 million NTT and short 500 million NTT DoCoMo
b) long and short in 4 Japanese banks
c) long $150 million of Sega



The conclusion of "Fortune's Formula" (the story of the Kelly betting criterion) is that Eifuku was guilty of overbetting. Nothing was particularly wrong with any particular idea ... just way overcommitted.
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