Murder mysteries are my favorite escapist literature. Not the Agatha Christie/village green school where there are six stock characters and we have to figure out who dun it, but international or high tech, biological weapon or political, medical or some variation thereof. Just read a financial mystery, Top Producer, by Norb Vonnegut. (No relation of THE Vonnegut.) It starts off with all the right ingredients, including a slick stockbroker protagonist, Grove O’Rourke, and a shredded body in the shark tank of the Boston Aquarium. But by page 100, this is what we get:
JJ owned $190 million of one stock. The markets can cut share prices 60, 70 or 80 percent in seconds. If Jack Oil crashed 50 percent, for example, JJ would lose $95 million. That’s why I wanted him to hedge.And so on. . .
A zero-cost collar would insure JJ against losses greater than the first 10 percent. Of the $95 million loss, JJ would eat the first $19 million. That’s 10 percent of $190 million. But with SKC’s hedge in place, my firm would pay him $76 million. That’s $95 million minus the $19 million. JJ limited his downside and avoided catastrophic losses.
From a promising murder mystery we get to a wealth management manifesto in a hundred pages. However, you’ve got to admire the finesse of these hedge fund operators.
Maybe they should get a large bonus.