Warren's Secret AAA Fixed Income Strategy

[jay21]

From the 2003 Annual Report:

 

I manage a few opportunistic strategies in AAA fixed-income securities that have been quite profitable in the last few years.  These opportunities come and go – and at present, they are going.  We sped their departure somewhat last year, thereby realizing 24% of the capital gains we show in the table that follows.

 

Though far from foolproof, these transactions involve no credit risk and are conducted in exceptionally liquid securities.  We therefore finance the positions almost entirely with borrowed money.  As the assets are reduced, so also are the borrowings.  The smaller portfolio we now have means that in the near future our earnings in this category will decline significantly.  It was fun while it lasted, and at some point we’ll get another turn at bat.

 

Anyone know what he is talking about?

[cayale]

Maybe going long off the run treasuries trading at a spread to on the run ones (which one could short)?

[twacowfca]

From the 2003 Annual Report:

 

I manage a few opportunistic strategies in AAA fixed-income securities that have been quite profitable in the last few years.  These opportunities come and go – and at present, they are going.  We sped their departure somewhat last year, thereby realizing 24% of the capital gains we show in the table that follows.

 

Though far from foolproof, these transactions involve no credit risk and are conducted in exceptionally liquid securities.  We therefore finance the positions almost entirely with borrowed money.  As the assets are reduced, so also are the borrowings.  The smaller portfolio we now have means that in the near future our earnings in this category will decline significantly.  It was fun while it lasted, and at some point we’ll get another turn at bat.

 

Anyone know what he is talking about?

 

Cayale,

 

You got it! 

 

That's what John Meriwether's team was known for at Salamon Brothers when Warren and Charlie came in to clean house.  That strategy later blew up at Long Term Capital along with other strategies during a flight to safety.  Never the less it is a virtual sure thing if leverage is kept low so that the position can be held until the spread narrows.

 

It's just the sort of thing Warren would do the right way with low leverage that wouldn't blow up.

[Green King]

From the 2003 Annual Report:

 

I manage a few opportunistic strategies in AAA fixed-income securities that have been quite profitable in the last few years.  These opportunities come and go – and at present, they are going.  We sped their departure somewhat last year, thereby realizing 24% of the capital gains we show in the table that follows.

 

Though far from foolproof, these transactions involve no credit risk and are conducted in exceptionally liquid securities.  We therefore finance the positions almost entirely with borrowed money.  As the assets are reduced, so also are the borrowings.  The smaller portfolio we now have means that in the near future our earnings in this category will decline significantly.  It was fun while it lasted, and at some point we’ll get another turn at bat.

 

Anyone know what he is talking about?

 

 

 

You got it! 

 

That's what John Meriwether's team was known for at Salamon Brothers when Warren and Charlie came in to clean house.  That strategy later blew up at Long Term Capital along with other strategies during a flight to safety.  Never the less it is a virtual sure thing if leverage is kept low so that the position can be held until the spread narrows.

 

It's just the sort of thing Warren would do the right way with low leverage that wouldn't blow up.

 

Can i get more than that ? details ? cases ? techniques ? application ? theory ?

 

Please  ;D

[twacowfca]

From the 2003 Annual Report:

 

I manage a few opportunistic strategies in AAA fixed-income securities that have been quite profitable in the last few years.  These opportunities come and go – and at present, they are going.  We sped their departure somewhat last year, thereby realizing 24% of the capital gains we show in the table that follows.

 

Though far from foolproof, these transactions involve no credit risk and are conducted in exceptionally liquid securities.  We therefore finance the positions almost entirely with borrowed money.  As the assets are reduced, so also are the borrowings.  The smaller portfolio we now have means that in the near future our earnings in this category will decline significantly.  It was fun while it lasted, and at some point we’ll get another turn at bat.

 

Anyone know what he is talking about?

 

 

Caylay,

You got it! 

 

That's what John Meriwether's team was known for at Salamon Brothers when Warren and Charlie came in to clean house.  That strategy later blew up at Long Term Capital along with other strategies during a flight to safety.  Never the less it is a virtual sure thing if leverage is kept low so that the position can be held until the spread narrows.

 

It's just the sort of thing Warren would do the right way with low leverage that wouldn't blow up.

 

Can i get more than that ? details ? cases ? techniques ? application ? theory ?

 

Please  ;D

 

Read Roger Lowenstein's book, When Genius Failed.  :)

[twacowfca]

From the 2003 Annual Report:

 

I manage a few opportunistic strategies in AAA fixed-income securities that have been quite profitable in the last few years.  These opportunities come and go – and at present, they are going.  We sped their departure somewhat last year, thereby realizing 24% of the capital gains we show in the table that follows.

 

Though far from foolproof, these transactions involve no credit risk and are conducted in exceptionally liquid securities.  We therefore finance the positions almost entirely with borrowed money.  As the assets are reduced, so also are the borrowings.  The smaller portfolio we now have means that in the near future our earnings in this category will decline significantly.  It was fun while it lasted, and at some point we’ll get another turn at bat.

 

Anyone know what he is talking about?

 

 

Cayale,

You got it! 

 

That's what John Meriwether's team was known for at Salamon Brothers when Warren and Charlie came in to clean house.  That strategy later blew up at Long Term Capital along with other strategies during a flight to safety.  Never the less it is a virtual sure thing if leverage is kept low so that the position can be held until the spread narrows.

 

It's just the sort of thing Warren would do the right way with low leverage that wouldn't blow up.

 

Can i get more than that ? details ? cases ? techniques ? application ? theory ?

 

Please  ;D

[hyten1]

http://en.wikipedia.org/wiki/On_the_run_(finance)

 

Trade section

[vikx01]

Green King,

 

This video has a lot more details. Sorry! it's long but it's worth the time. Rosenfeld was a trader at LTCM.

 

http://video.mit.edu/watch/eric-rosenfeld-15437-presentation-21909-3771/

 

I also found this interesting:

 

Both FRM and PRMIA had a case study on this as far as I remember. There is also a case study from HBS on this.

 

 

 

[Green King]

Thanks you vikx01

 

I will enjoy this greatly.

 

 

[twacowfca]

Thanks you vikx01

 

I will enjoy this greatly.

 

Sorry, my answer didn't  connect.  Good background on the trade can be found in Roger Lowenstein's book: How Genius Failed.

 

Best wishes.

[Green King]

Thanks You your guidance is much appreciated (don't read too much into things.)

 

Thanks you vikx01

 

I will enjoy this greatly.

 

Sorry, my answer didn't  connect.  Good background on the trade can be found in Roger Lowenstein's book: How Genius Failed.

 

Best wishes.

 

 

[Green King]

 

I also found this interesting:

 

 

very.. seems he is applying MOS into his fund structure so he can make the real money in his arbitrages. (survival first and waiting for fat pitches)   

[netnet]

The way LTCM practiced this, it was like picking up nickels in front of a locomotive.  The way WEB practices it; it is like checking the lounge chair at the pool for nickels, just before settling in to enjoy your afternoon cocktail!

[twacowfca]

The way LTCM practiced this, it was like picking up nickels in front of a locomotive.  The way WEB practices it; it is like checking the lounge chair at the pool for nickels, just before settling in to enjoy your afternoon cocktail!

 

That's good.  :)