Andrew Lahde of the aptly-named Lahde Capital is one of the rock stars of the current market -- one of his hedge funds returned an astounding 870 percent last year by shorting the ABX indices. That fund has now wound up its positions; not because residential real estate and subprime debt don't have further to fall -- they do -- but because he felt it was getting too expensive to bet on a continued downturn. (In other words, everyone's sort of figured out by now that subprime stinks, and that this real estate thing is likely to suck for some time). But another of his funds is actively shorting commercial real estate via the CMBX indices. In an investor letter published over at the FT Alphaville blog, Lahde's comments are worth reading:
I’d like to use an analogy from Peter Schiff’s book. If the commercial real estate market was a beach ball, picture my arm holding the ball. If I take my arm away, everyone knows that ball will fall to the ground. However, many foolishly believe that somehow if you take cheap financing (my arm) away, the ball will remain afloat. Risk premiums for this type of debt have skyrocketed as exhibited by the CMBX. If you dramatically increase the risk premium for an asset class, especially one that is so heavily financed, the value of that asset class must fall. End of story. The losses will materialize. Admittedly I don’t have a clue how severe the losses will be. I don’t have a model that can correctly predict all the variables. Luckily no one else on the planet has such a model either. I gave up on the ability of models to correctly predict the value of securitizations a few years ago. I do know one thing though. It is safe to assume a market is dead when deal volume falls to zero, as was the case with CMBS issuance during January 2008.
Beyond the indescribable joy we get from hearing about a hedge fund manager essentially sticking it to the quants -- who needs models if everyone's taking the same bath? -- that last sentence should stun anyone in the capital markets. No CMBS deals in January. None. Nada. Zip. Zilch. Zero. Nunca. Lahde-dah, indeed.