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Tags: Buffett | Takes | Hit | Hedge | Fund

Buffett Takes Hit on Hedge Fund

Saturday, 26 November 2005 12:00 AM

(Headlines - scroll down for full stories)
1. Buffett Fund Could Lose Millions
2. iPods in, Denims Out, Kids Say This Xmas

A major hedge fund backed by billionaire Warren Buffett could lose up to $34 million due to a bad bet on interest rates.

Bermuda-based Value Capital LP, a $570 million hedge fund, lost the money sometime in the first nine months of 2005, according to documents filed by the fund for the Securities and Exchange Commission (SEC) on November 4.

Fund manager Mark Byrne told Bloomberg this week that his bet that long-term borrowing costs would rise faster than short-term rates as the US economy strengthened backfired. That didn't happen as the gap between 2-year and ten-year bond yields, known as the yield curve, narrowed by more than 1 percentage point to the smallest since January 2001, as the Federal Reserve raised the overnight bank lending rate 12 times, Bloomberg reports. Byrne's fund is down five percent so far in 2005.

"I don't understand why the yield curve is so flat," a perplexed Byrne told the wire service. "We had bets in the direction of a steepening yield curve as the U.S. recovered from its cycle and the Fed started to raise rates."

Berkshire Hathaway had invested about $430 million in the seven-year-old fund through the end of 2002 and recorded $173 million of profits, a March 2003 filing with the SEC shows. The investment company sold $125 million from the fund in December, 2004, cutting its fund holdings to 62 percent from 90 percent on June 30, 2004, according to an SEC filing in March.

Bloomberg says that Byrne wasn't the only money manager to make the wrong call on the yield curve. Relative-value arbitrage hedge fund is down almost 1.7 percent this year, according to Chicago-based Hedge Fund Research Inc.

"A lot of people who placed bets on the yield curve steepening did get hammered," Duncan Hennes, chief executive officer of PFG Advisors, a Greenwich, Connecticut, hedge fund firm, told Bloomberg.

Analysts say that a 65 percent rise in Treasury bonds that were purchased by foreign investors have rocked the fixed income market this year. The influx of foreign cash has reduced volatility, in the bond market and hedge funds like Value Capital looks to capitalize on big price swings to register portfolio gains. "A huge excess of liquidity in the world has created a lot of buyers for bonds," Byrne told Bloomberg. "That could explain both the low volatility and the low level of long-term yields."

Value Capital has been in the black for the past six years, earning an average annual return of 7.5 percent for Berkshire Hathaway after fees and expenses.

It's not Buffet's habit to entrust money in funds managed by outside fund managers.

But there may be some nepotism in the air. Bloomberg reports that Byrne is the son of Jack Byrne, who became chief executive officer of Geico Corp. in 1976 and saved it from bankruptcy after Berkshire Hathaway invested in the auto insurer. Patrick Byrne, Mark Byrne's brother, worked from 1997 to 1999 as CEO of Fechheimer Brothers Co., a uniform maker owned by Berkshire Hathaway.

"We've made a lot of money with the Byrne family," Buffett told Berkshire Hathaway shareholders at the company's 2003 annual meeting. "I've looked at Mark's portfolio and I like the positions."

2. iPods in, Denims Out, Kids Say This Xmas

Kids say the darndest things – and now they're going on record with predictions about hot items for the holiday shopping season.

Based on a study by Seton Hall University's Stillman School of Business, under the guidance of Scott Rothbort, M.B.A., professor of finance at Seton Hall and president of LakeView Asset Management, LLC, a team of 23 Seton Hall students interviewed teen-age 564 younger shoppers, asking a wide range of questions including the impact of energy prices and interest rates upon their shopping lists and plans.

The study reports that:

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(Headlines - scroll down for full stories) 1. Buffett Fund Could Lose Millions 2. iPods in, Denims Out, Kids Say This Xmas A major hedge fund backed by billionaire Warren Buffett could lose up to $34 million due to a bad bet on interest rates. Bermuda-based Value...
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2005-00-26
Saturday, 26 November 2005 12:00 AM
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