“Dear Investor” — Quant Letters to Clients

These are floating around anyway, so we might as well offer them all up in one place: (Thanks, Rob!)

Below you will find the various letters written to clients from many of the quant shops which have experienced some "dislocations over the past month or so.

The list includes:

AQR (AQR.pdf)
Barclays Global Investor (
Black Mesa Capital (Black Mesa.pdf)
Highbridge Statistical Opportunities Fund (
Renaissance Technologies (Renaissance Technologies.pdf)
Sowood Capital Management (Sowood.pdf)
TYKHE (GS) (Tykhe.pdf)

I found it particularly interesting that very few managers took real responsibility for what occurred. Only Jim Simons of Renaissance Technologies actually blamed their own system ("the principal culprit was our Basic System") for the recent performance issues.


Did I miss any? If so, forward a PDF to me for posting . . .


Update:  August 23, 2007 10:23am

An amusing variation of these letters comes to us courtesy of Long or Short Capital blog via fund manager Scott Frew:

Long or Short Capital "Dear Valued Client" 
"Dear valued client".pdf

Update 2:  August 23, 2007 3:09pm

I see that most of these ran earlier this month in the WSJ:

Dear Investors, We’re…

Hedge Funds Strain To Find Words to Say ‘Sorry’ for Your Losses
August 16, 2007; Page C1

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What's been said:

Discussions found on the web:
  1. peter from oz commented on Aug 23

    in the last 48 hours over here all is forgiven
    we premature bears are back in the cave
    mr market 1 bears 0
    rgds pcm

  2. SPECTRE of Deflation commented on Aug 23

    From Mish’s site regarding the BS move by the 4 banks collectively getting two billion at the window. They did it because they had to and not to remove any stigma. Who in their mind would pay 5.75% when you can tap money for much less? The problems are marking to Goldilocks and nothing but debt left after the big party.

    Brave Face Masks Bold Lie

    The Herald Tribune is reporting JPMorgan Chase, Bank of America and Wachovia join Citi in borrowing $500M each from Fed.

    Four major banks said Wednesday they each borrowed $500 million (€370.5 million) from the Federal Reserve’s discount window, lending weight to its efforts to restore liquidity to tight markets.

    Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wachovia Corp. (WB) each stressed they themselves have “substantial liquidity” and the ability to borrow money elsewhere.

    In a joint statement, the latter three said they decided to borrow directly from the central bank to demonstrate “the potential value of the Fed’s primary credit facility” and encourage its use by other banks. It was not clear if other banks had also decided to borrow from the Fed.

    Citigroup was the first to announce its decision to borrow the money, “on behalf of its clients” at Citibank.

    “Citi is pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients,” the company said. “Citibank stands ready to continue to access the discount window as client needs and market conditions warrant.”

    It was followed minutes later by the three other banks.

    “The companies believe it is important at this time to take a leadership role in demonstrating the potential value of the Fed’s primary credit facility and to encourage its use by other financial institutions,” their statement said. The three added that they hoped their actions would “promote broad acceptance of the use of the facility.”
    This is either blatant stupidity or a bold face lie. I believe the latter. How can one “restore liquidity” by borrowing money that one supposedly does not need? The statement makes no sense.

    As for Citigroup, what exactly does borrowing money “on behalf of its clients” mean? What clients? Who is in trouble here?

    By making this look like a respectable thing to do (it’s not), it likely covers up the likely fact that someone is in trouble. Inquiring minds might no be saying “Mish, you are talking conspiracy”. Of course I am. But like most conspiracies this one is in plain sight. We simply do not have all the i’s dotted and t’s crossed in regards to the details.

    A well respected source whose opinion I respect offered this viewpoint anonymously: “Basically this is a PR move coordinated by Fed to hide the fact that going to window is emergency move. It hides the fact that some banks have to.”

  3. SPECTRE of Deflation commented on Aug 23

    Barry didn’t you know we are all victims all the time? No responsibility needed. Just ask Little Chuckie Schumer if ya don’t belieive me.

    As Curly of the 3 Stooges would say, “I’m A victim of soy…camstance”. So please, yes they lost their clients money, but it’s just plain mean to pick on the poor souls.

  4. Sailorman commented on Aug 23

    This is slightly off topic, but can someone explain how banks borrowing from the discount window and paying 1.25% more interest than is readily available is a good thing?

  5. peggy commented on Aug 23

    maybe that 2 billion borrowed was funneled over to BAC to make the cash infusion into Countrywide. BAC is the client? How else could the fed get money to Countrywide? It is absolutely brillent!

  6. Philippe commented on Aug 23

    When looking through the statement of Wells Fargo through the lenses of Bloomberg explanations and the presentation of the Bank (please see BP 23/08/2007), the only conclusion available was they are leveraged and their hedges are/ were additional leverages, which turned the same way as their books.
    Reading the « quant » letters leverage and leverage and deleverage the main culprit.
    Yes they will be opportunities of turn around in the sub prime based on a more accurate assets and revenues streams reappraisal, (as usual the herd throws and purchase everything at the same time), but there is a caveat why Quants do not explain the nature of the losses through the evaluation of the underlying assets? Clients cannot pin recovery hopes on such vague letters, the job of these funds is to be able to evaluate the assets and the revenues streams if they did not /could not before where will be the improvement now through their management ability?
    Investors know that « What is well understood may clearly be explained »

    Explanations given are markets based and NOT fundamentals based.

  7. SPECTRE of Deflation commented on Aug 23

    This is slightly off topic, but can someone explain how banks borrowing from the discount window and paying 1.25% more interest than is readily available is a good thing?

    Posted by: Sailorman | Aug 23, 2007 7:57:35 AM

    This explains why they are hitting the discount window. They have to. They are desperate to find a greater fool to dump the paper on. This gives them more time to find some suckers…I mean investors to help get out from under all that worhtless paper. With the FED taking boat loans and mark to Goldilocks paper it looks like they have bought themselves more time. Why not set up a pawn shop in each FED Region so that the little guy can take all the shit he/she doesn’t really need just like the Boyz get? Seems only fair to me!

    Dean Baker’s commentary on economic reporting

    The media have the country cheering the efforts by Bernanke and the Fed to stabilize the financial markets. They have convinced the public that Wall Street is the home team and that we all will benefit if the banks can be kept solvent and the financial turmoil of recent weeks comes to a halt. That is not true.

    The main reason that the financial markets are in turmoil is that banks, hedge funds, and other financial institutions hold trillions of dollars in bad debt. Much of this debt is backed by mortgages that exceed the value of the homes against which they were issued, the result of an unprecedented run-up of house prices.

    What is happening now is that the banks and funds, after being oblivious to risk for the last five years, suddenly noticed that much of the debt they hold is not very creditworthy. They desperately want to dump this debt and exchange it for safer assets. The Wall Street crew wants the Fed to lower interest rates, which will reduce the cost of carrying this debt, and thereby give them more time to find some suckers on whom to dump it.

    There is no general public interest in having the government assist the Wall Street crew in their efforts to dump their debt on less informed investors. They profited on the upside, they absolutely deserve the losses that stem from their failure to exercise good judgment in their investment decisions.

    On the other side, the core problem is that house prices have become hugely over-valued. While the rate of home sales is down more than 20 percent from its 2005 peaks, there are still more than 100,000 people buying a home every week. In many cases, these people are buying homes in bubble-inflated markets that may be over-valued by 50 percent or more.

    Imagine a hypothetical middle income family. Say, a factory worker who is married to a retail clerk. They have a combined income of $50,000 a year. They saved enough for a reasonable downpayment and now want to purchase a $300,000 home in one of the bubble areas. Since the market is currently hugely over-valued, the house price eventually falls back by one-third (in real terms) to $200,000, costing this family $100,000.

    There are millions of families who look like this. Every week that the housing bubble persists, more of them will make an enormous financial mistake that may impose a serious hardship on them for the rest of their lives. Bernanke and the Fed will not be bailing them out. Middle class families have to live with the consequences of their mistakes.

    It is not the Fed’s job to protect the financial industry from its own mistakes. As Greenspan and Bernanke said repeatedly in response to questions raised about first the stock bubble and now the housing bubble, the Fed can deal with the consequences of the collapse of financial bubbles. I’m skeptical about how well it will be able to deal with the consequences of the collapse of the housing bubble, but the Fed certainly has no business deliberately propping up financial bubbles so that more informed investors can recover from their mistakes. (In this respect, the Fed’s decision to encourage the use of mortgage backed securities as collateral on loans was completely improper. It should not have been giving its seal of approval to bad debt – I take back my earlier more benign view of this action.)

    After having largely neglected to report on the growth of the housing bubble over the last five years, the media should start reporting on the losers in this bailout story. If the Fed can give the big Wall Street boys the opportunity to save themselves by unloading bad debt, then it just means that others will be the ones to eventually pay the price. The media should make it clear that bailing out Wall Street is not win-win; it is a win for Wall Street where some sucker down the road takes the hit.

  8. SPECTRE of Deflation commented on Aug 23

    The FED’s actions are working. I can see it in the fact that the dollar is once again tanking. 81.05 this morning and soon to be headed back down to test the all time low.

    So while Wall Street rejoices, we are getting ass kicked by the exchange rate. People wonder why I use the term sheeple. I use it because it took seven years for the DOW to get back to the levels of 2000 while at the same time the value of the dollar is down by a third. Inflation is the hidden tax we are all paying for all this wonderful news. Factoring in inflation, we would need to be much higher than current levels just to get back to where we were 7 long years ago. Party on Garth!!!!!

  9. Josh commented on Aug 23

    Spectre…maybe you should get your own blog.

  10. mhm commented on Aug 23

    Borrowing from the discount window has a very bad stigma in the US. The four banks trip to the window was, in my opinion, a staged display of “business as usual”. Like a prude going to Hooters and trying to look casual.

    Other countries have the same mechanism and it works fine. I think the Fed and the banks just want it to look normal business (because it might as well be in the near future).

  11. SPECTRE of Deflation commented on Aug 23

    Spectre…maybe you should get your own blog.

    Posted by: Josh | Aug 23, 2007 9:01:58 AM

    I know I’m off topic, but only to a point. We are watching a slow motion train wreck, and I’m trying to make some sense out of this rigged market. Hopefully Barry will forgive my transgressions. :>)!

  12. michael schumacher commented on Aug 23

    Said it before….here it is again

    Protect those bonus’


    AS if by magic all those “bad loans” are going to be bought out after labor day. And save the executives from not getting a bonus.

    Loved the verbage with the Fed discount funds. “yea we’re ok and it’s only demonstrating that the system works…..and that we are paying %1.25 over normal rates to just show you that it works”…

    effing Crooks


  13. KP commented on Aug 23

    When you raise a generation of women, you get an increase of pussies. ipso facto.

  14. michael schumacher commented on Aug 23

    CFC pops a secondary on the market (did they have an existing shelf reg.?) at $18 and it’s up over 23??

    Total effing madness.


  15. peggy commented on Aug 23

    yea we’re ok and it’s only demonstrating that the system works…..and that we are paying %1.25 over normal rates to just show you that it works”…

    that $2.b was invested/lent in/to countrywide at 7.25%

  16. Marcus Aurelius commented on Aug 23

    Party on Garth!!!!!

    Posted by: SPECTRE of Deflation | Aug 23, 2007 8:23:45 AM


    I knew the Banks and Wall Street had true loyalty to all of the little people! They won’t forclose on the farm! They’ve come to rescue us, individually, and the American way, generally!

    These boys are selfless!

    Party on Wayne!

  17. SPECTRE of Deflation commented on Aug 23

    yea we’re ok and it’s only demonstrating that the system works…..and that we are paying %1.25 over normal rates to just show you that it works”…

    that $2.b was invested/lent in/to countrywide at 7.25%

    Posted by: peggy | Aug 23, 2007 9:37:47 AM

    How much is 7.25% worth when the principal is worth a big fat goose egg? Are we still calling this investing? I know the FED is taking boat loans, so when can we all get our money back on those beautiful LG washers and dryers that ran 3K with the whiz bang attachments? I mean there are people out there hurting I tell ya, and the FED must open up the PAWN SHOP WINDOW!

  18. Marcus Aurelius commented on Aug 23

    The FED must open up the PAWN SHOP WINDOW!

    Posted by: SPECTRE of Deflation | Aug 23, 2007 9:51:34 AM


    And the Countrywide/BAC deal is the world’s biggest payday loan.

    BTW: I have this violin – it’s a Stradivarius (swear to god) – how much will you give me for it? I only need the money until Sept. 15th.

  19. SPECTRE of Deflation commented on Aug 23

    I can feel your pain. LOL! I have some beautiful bridges in the FL Keys that simply must be sold, but in the mean time I’m open to borrowing up to my eyeballs if the FED can spare just a little bit for ole’ SPECTRE.

    Meanwhile Heli-Ben has done 3 injections today, don’t overdose Benny, 7B, 7B and a tiny little 3.25B. Go Benny go!

  20. SPECTRE of Deflation commented on Aug 23

    After those injections, I’m tickled to say we are up a whopping 14 points on the INDU. Ahhhhhhhhhh, the sweet smell of success.

  21. Marcus Aurelius commented on Aug 23

    No takers on the Stradivarius?


    …I also have these gold fillings….

  22. Marcus Aurelius commented on Aug 23

    Posted by: SPECTRE of Deflation | Aug 23, 2007 10:48:22 AM


    Read the article earlier. Old sayings get old for a reason. Here’s one:

    When you find yourself in a hole you can’t get out of – stop digging.

  23. JJ commented on Aug 23

    I ran US Trading for a global investment bank . We had a $5B Program Trading desk (plus leverage ) who could barely make money on a good day , much less in turbulent times . 20 traders and quants , plus a middle-office and back-office to support them ….. it was a waste of capital which could’ve been better used in capital-commitment

  24. Walt French commented on Aug 27

    The discount window can work by letting banks be agents for firms that are sitting on a bunch of illiquid assets. Those firms sell (loan?) them to BofA (very special conditions apply), which in turn hands them over to the Fed for collateral on the loan to BofA, which passes (most of) the cash on to the owner of the Asset-backed securities that are too hot to sell.

    Presto! “liquidity” for suspect paper, with the bank taking on some of the valuation risk in exchange for a goodly fee, and greatly reducing capital risk to the system. I’d be happy to be in that business, any day!

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