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By Root 719 0

Joyti De-Laurey, personal assistant at Goldman Sachs to his wife, Jennifer Moses, went on trial and was convicted of forging the Bellers’ and Moses’ signatures to filch funds from their personal accounts. Beller and his wife asked De-Laurey to work for them personally when they both left Goldman Sachs, but De-Laurey stayed to become the personal assistant of another Goldman Sachs partner, Scott Mead. She was also convicted of filching funds from him. De-Laurey reportedly took £4.4 million (around $8.75 million in 2008 dollars) from the collective accounts of Scott Mead, Jennifer Moses (Beller’s wife) and Ron Beller. Neither of the Bellers noticed that De-Laurey had taken millions from their personal accounts for several months. Is it any wonder that during the trial De-Laurey referred to Mr. Beller as “an absolute diamond”?3 Yet, when Beller co-founded London-based Peloton in 2005, investors seemed eager to let him manage their money.

Ron Beller and Geoff Grant, another former Goldman Sachs partner, ran Peloton Partners, named after the vee-like bird formation adopted by endurance bicycle riders that lead the pack by taking advantage of drafting to reduce wind friction. In January 2008, Peloton Partners LLP was riding high. It had two funds, the $1.6 billion Peloton Multi-strategy fund, and the $2 billion Peloton ABS fund.4 The latter fund won Eurohedge’s best new fixed-income fund of the year award, after reporting a stunning net return of 87.6 percent for 2007.When the fund’s returns were announced, some of the attendees at the awards ceremony “gasped.”5 Shock and awe. Beller and Grant were lauded as “hedgie heroes.”6 Within two months of receiving these accolades, Peloton’s $2 billion ABS fund collapsed, and Peloton put its offices up for sale.

Beller told potential investors that his strategy was to make bets on a variety of assets to make money from global economic trends. He made leveraged bets on these trends, and for that to work, he had to be on the right side of the trend.

Initially, the ABS Peloton fund took short positions in subprime mortgage backed securities making huge bets against the U.S. housing market as John Paulson had done very successfully. Since the prices of those securities plummeted in 2007, the short position had huge gains. But what would Peloton do for an encore? There had to be another big trade. If only Peloton Partners could pedal to where there was luck—there must be more money! After all, spread relationships for AAA and AA rated products looked out of line with historical relationships. The spread curve should revert back to historical levels, according to the market timer’s nursery rhyme. So the fund also bet that the “highly rated” mortgage securities trading at more than 90 cents on the dollar would be protected by subordinated investors eventually paying back all of the principal, and he went long these assets. Like market timers before them, Peloton Partners ended up with speculator’s results. A fundamental analysis of the type Graham had advocated suggested that those “highly rated” products were overpriced and overrated. The prices were not going to revert back to “historical” levels; the prices would drop to reflect a lower fair value based on imperfect (but highly negative) loan performance data combined with the illiquidity that uncertainty about one’s imperfect data brings. This is a market timer’s worst-case scenario. Peloton Partners lost $17 billion in “a matter of days.”7

The Peloton ABS fund used credit derivatives (it sold protection) to go long $6 billion of exposure to two ABX indexes (the 2006 AAA and 2006 AA rated ABX indexes). In all, it was long $15 billion on various mortgage-backed assets and only partially hedged with short positions. Peloton was said to have leveraged up four or five times, “normal for a credit fund.”8 Leverage “averages” are misleading when the assets themselves are inherently very risky (mispriced in the opposite direction to your trade). When the price of the “highly rated” 2006 ABX indexes continued to drop, Peloton’s 14 lenders,