Stay Defensive and Avoid This $10 Billion Hedge Fund Mistake

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.
A trader looks at a mixed financial picture

When I was new on Wall Street, a group of hedge fund managers called the Tiger Cubs ruled the world. 

Last week, one of them washed out spectacularly, wiping out a $10 billion career in the process. I want you to know that you can avoid repeating that mistake if you keep your eyes open and stick to one simple principle: pick your own exits.

Never let anyone else force you to lock in a loss. After all, that’s how the Tiger Cub met his downfall. Bill Hwang had $10 billion in stock and used borrowed money to trade at least $40 billion more. He was on top of the world.

But when you take on that kind of leverage, your brokerage firm can dump the stock when things go wrong. And if you see the margin call coming, all you can do is sell the shares yourself to raise cash.

Either way, somebody’s going to end up dumping your stock at liquidation prices. It’s a rookie error nobody wants to make.

You can avoid it. All you need to do is build enough regular cash flow into your portfolio to cover the carrying costs.

Stay Defensive: Paying the Price of Patience

First, if you want more up-to-the-minute market commentary from me, my YouTube channel has it all. We’ve recently discussed the Bitcoin craze and other topics. Subscribe and you won’t miss anything.

As for Bill Hwang, he ran into trouble when his stocks failed to make a profit before his lenders called in his debt. If he’s anything like me, he loved those stocks and wanted to give them the time they needed to pay off.

But when the interest clock is ticking on your loans, waiting too long can get expensive. For retail investors, leverage can cost 8% a year, which limits the amount of time you want to hang around in positions that aren’t working.

Stay Defensive: Avoid Huge Carrying Costs

Carrying costs also forces your investments to work harder to be worthwhile at all. If you’re paying 8% a year, you need to make at least 9% just to get ahead.

Reading between the lines, that’s how the Tiger Cub got trapped. When his initial positions failed to deliver instant gratification, he needed to chase bigger and faster returns to catch up.

He reached for more risk and more leverage. The banks gave him more rope. And then they took it all away.

Stay Defensive: Strikeouts Can Affect Every Investor

Anyone who has been in the market any length of time knows that we all hit strikeout seasons when nothing normal works. For a lot of hedge funds, that describes the last few months of the Robinhood rampage.

Bill Hwang was trapped. He could have saved himself by allocating part of his massive portfolio to stocks that pay regular cash dividends.

Remember, dividends reward you as long as you’re a shareholder. Lock in a good yield and there’s no urgency to ever sell a single share.

Stay Defensive: Cash Remains King for Savvy Investors 

Meanwhile, the cash coming in buys you freedom of action and clarity of thought in a market downswing. While you still might need to lighten a few positions to raise money, forced liquidations of the Bill Hwang variety become a lot less likely.

Instead of selling into weakness, you can hold on for better market conditions to emerge. With enough cash coming in, you can even exploit opportunities to accumulate stocks at lower levels.

That’s always the goal. Have cash available to buy the dip. And then resist the urge to sell at a loss.

Stay Defensive: Dividend Stocks Offer a Refuge

Bill Hwang got so greedy that those decisions got taken away from him. Most billionaires I know keep plenty of cash in “boring” dividend stocks, index funds or even old-fashioned bank accounts.

He evidently didn’t. Maybe he should have subscribed to my Value Authority, where the goal is to lock in those yields and buy freedom for the rest of the portfolio to ride the market waves.

And my IPO Edge maintains dividend-paying positions to cushion Wall Street’s mood swings. Those stocks have been a solid foundation lately as “hot money” funds pivot toward defense.

I’m surprised it took those fund managers so long to remember the basics. But maybe watching a Tiger Cub fail scared them.

I’m talking about all of this on my Millionaire Makers radio show (Spotify)(Apple) and video channel (YouTube). Subscribe now so you never miss an episode… or an opportunity!

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