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Net Net: Promoting innovation and managing change

A Fink-ing Mess!

Larry Fink
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The losses at Josh Fink’s hedge fund, Enso Capital Management, are being portrayed as a sort of ironic tale because Fink is the son of one of the archdukes of Wall Street, BlackRock chairman Larry Fink.

“Maybe he’s not a chip off the BlackRock after all,” the New York Post writes.

“His father may be one of the country’s most successful money managers, but that hasn’t helped Josh Fink beat the markets,” AR magazine’s Rob Copeland writes.

But, really, Fink the Younger isn’t all that different than Fink the Elder.

Copeland’s story in AR meticulously follows the rise and fall of Enso.

The firm was founded in 2002, when the younger Fink was just two years out of college, with just $4 million. Fink the Elder apparently tried to talk Josh out of starting the fund but eventually agreed to provide start-up funds.

The fund’s assets under management grew to as much as $700 million by 2008, when it stumbled badly during the financial crisis. The next two years, however, were boom times for the firm.

“The firm posted returns of 83 percent in 2009, 81 percent in 2010, and 2 percent in the first two months of 2011 thanks to prescient wagers on materials stocks that had been trading at near-distressed levels after the crisis, such as oil and gas exploration company Rosetta Resources (up 541 percent in that period) and Uranium miner Paladin Energy (up 122 percent),” Copeland reports.

Assets under management rose to $230 million. Then Enso started losing money in March 2011 and never recovered. Its investments fell 60.5 percent last year, and is down more than 7 percent through April.

Assets under management have declined to just $44 million, according to Copeland.

Part of the problem, as you may have guessed from these yo-yo returns, is that Fink basically took his positions naked of hedges.

“When examining what went wrong at Enso, particularly during the double-digit monthly losses of last year, a portrait emerges of a young, confident manager convinced of his own positions even as they turned disastrously against him. One reason for Enso’s extreme decline during last year’s volatile market conditions was its lack of offsetting hedges,” Copeland explains.

This doesn’t sound much like the Fink the Elder of today. But before Larry ran BlackRock he was the head of the bond department at First Boston. And his group was responsible for nearly $100 million in losses in a single quarter — a loss that pretty much ended his career at First Boston. You can read the story in the excerpt of Charlie Gasparino’s “The Sellout.”

Fink’s biggest error, it seems, was overconfidence. He believed he knew more than just about anyone about how mortgage bonds traded. He was convinced his team’s technology was better than anything anyone else trading mortgages had. And so the losses he experienced — losing both on his primary positions and his hedges — seemed impossible even as they were happening.

Fink had overestimated his ability to foresee market outcomes. The world turned out to be far more random than he believed. The correlations he had based his trades on broke down.

So don’t be so quick to assume that Fink the Younger somehow isn’t living up to his father’s track record. Actually, he seems to be following right along in dad’s footsteps.

As a result of the losses, the 34-year-old Fink now manages just $44 million, down from as much as $700 million in 2008.

Fink’s dramatic reversal from hedge fund wunderkind to has been was reported yesterday on the website of AR.

Larry Fink sits on the board of Enso, as does BlackRock trustee James Grosfeld. The two had a combined 15 percent stake in the fund from inception, according to documents quoted in the article.

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