Mar

3

 From a 1996 profile of Harvard's Buddy Fletcher in New Yorker:

His particular skill lies in devising vertiginously complex "hedges" to insure minimal loss if stocks decline while maintaining maximum profit potential if the stocks rise. His audited annual returns for the last five years have averaged over 350%, and on some days during that period his tiny firm has accounted for more than 5% of the trading volume at the New York Stock Exchange. A safe estimate would put his personal wealth at somewhere around $50 million.

There are many alarming items there — the Madoffian hedging so that really you can't go wrong while you're making 350%, the 5% of the NYSE trading volume (EdSpec observed that there are several hundred tiny firms that each control 5% of NYSE trading volume).

Charles Pennington writes: 

I thumbed through the section in Buddy Fletcher in the Jack Schwager book Stock Market Wizards (excerpts can be found under Google Books), and he has what at first seem to be some reasonable ideas for making money:

–arbitrage between the different tax needs of U.S. and overseas clients, especially the treatment of dividends

–some kind of option arbitrage that exploits the mismatch between option prices that involve a risk-free interest rate and clients who have to pay a relatively high commercial interest rate to borrow

Now those seem like reasonable germs-of-ideas, but surely they'd have very limited capacity, and surely they'd become widely known pretty quickly. They don't seem consistent with the 1996 New Yorker article description:

"His audited annual returns for the last five years have averaged over 350%, and on some days during that period his tiny firm has accounted for more than 5% of the trading volume at the New York Stock Exchange."

Humbert Humbert replies:

An astute colleague explains that the fancy options ideas described by Fletcher in Schwager's "Stock Market Wizards" sound like nothing more than ways to take advantage of the cheap access to capital that he had from his firm. If the bank let him borrow to trade and pay below-market interest rates, then he could make money just by buying a money market fund. The fancy (and almost riskless) "box " options spreads that he describes probably served the purpose of a money market fund.


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