Sunday, October 12, 2008

Remember Rocker Partners?

Of the "naked" short selling fame? When the "short" crowd was accusing Rocker Partners of naked shorting, Roddy Boyd of the NY Post was always defending them, and saying that "naked" shorting wasn't even a problem. Now it's a criminal enterprise in the hundreds of billions of dollars, where you can make more money shorting stocks with naked shares with less risk than being a player running a cocaine cartel!

Rocker Partners now does business as Copper River Management, and Roddy Boyd, is once again, writing fluff pieces about them, but this time it is with Fortune magazine and not the New York Post! The fund lost 55% of it's money in two weeks, but Roddy, in his infinite wisdom, said it wasn't their fault.

Some solace that will be for it's investors!

But for noted short-sellers Copper River Management, a $1 billion hedge fund based in Larkspur, Cal., the month turned into a perfect storm.

A devastating combination of counter-party failure, sudden regulatory edicts and margin calls conspired to turn the fund's performance on its ear, leading to a 55% loss in just two weeks.

According to people familiar with Copper River, the fund's management has sent out a letter to its investors in an attempt to explain the crisis and to retain enough capital to keep operating.

Year had looked decent

What's worse for Copper River is that the battering had nothing to do with the quality of its investments - the fund, which primarily bets on the declining value of stocks it reasons are sharply over-priced, was otherwise having a decent year, returning about 5%...

The recent problems for Copper River began in the middle of last month as Lehman Brothers began to totter. According to Copper River investor and another person close to the fund, Copper River had put on a series of derivative trades with Lehman as its counter-party. As certain stocks dropped in price (as described to Fortune, the derivatives were structured as put options, allowing the fund to sell a stock to Lehman on the belief that it could cover the sale at a lower price at a later date), the trade would become more profitable for the fund.

When it became apparent that Lehman was in serious straits, Copper River unwound the trade and awaited the return of the capital it put up as collateral. But Lehman filed for bankruptcy September 15 and Copper River's money became tied up in the firm's mounting court battles with creditors.

On top of that, as Lehman unwound its own internal hedges to the Copper River trades, its trading desks bought shares of these companies, driving up their prices and leading to losses for Copper River..

As prices in those stocks shot upwards, Copper River was forced to cover - or buy back - some of its positions at steep losses. The rising stock prices also led to a series of margin calls (demands for additional cash collateral to be deposited in a margin account) from Goldman Sachs, Copper River's prime broker. A Goldman spokesman did not return a call seeking comment.

Anyone want to bet that their stocks were on Goldman's "liquidation-unwind" trades list?