The $300 Million Blunder

| March 26, 2011 | 0 Comments

Jabre Bought Japanese Shares After Quake, but Bailed Too Soon, Missing Rebound

Few investors have made as many mistakes navigating markets over the past two weeks as Philippe Jabre.

Mr. Jabre, one of Europe’s best-known hedge-fund managers, bought Japanese stocks on news of the earthquake, and then suffered when the Nikkei Stock Average quickly tumbled 13%. Making matters worse, Mr. Jabre got nervous and sold his shares last week, just before a rebound in Japanese stocks. The miscues cost his firm about $300 million, the worst few days of his career.

But as Mr. Jabre reflects on his decisions, he isn’t sure he made many mistakes.

“I keep thinking about it, what could I have done differently?” said Mr. Jabre, who manages $6 billion hedge fund Jabre Capital Partners SA. “I spent all last weekend asking questions” of friends, colleagues and clients, he said. “We couldn’t take the risk of the Tokyo Stock Exchange closing down, so we sold” Japanese shares.

Investors have been forced to negotiate treacherous markets over the past few years, perhaps none more uncertain than those of the past two weeks. They made on-the-fly judgments about the extent of the devastation from March 11’s earthquake and tsunami, the impact of the unfolding nuclear crisis, and their effects on the global economy.

A former star trader at British hedge fund GLG Partners, Mr. Jabre, 50 years old, left to start his own firm in early 2006. When most rivals were racking up huge losses in 2008, the Lebanese-born investor scored gains in one fund of 3%, 46% in 2009 and 4% last year.

Suddenly, however, many of his decisions are losers. At the end of February, Mr. Jabre’s firm was cautious about Japanese and U.S. markets. He told a colleague he was hoping for a pullback in prices, so he could plow some money in.

On the Friday the earthquake hit, Mr. Jabre saw his opportunity as stocks weakened. At the time, one of his funds, the JabCap Global Balanced Fund, held futures contracts on the Japanese market that would profit if prices declined, a form of protection for the fund. Mr. Jabre, who last year criticized investors for being “too scared” about the European debt crisis, was convinced Japan would rebound.

That day, he stole a few minutes in his private office and lit a cigar. He weighed his options before taking his spot on the firm’s trading floor, with a full view of the mountains and rivers surrounding old Geneva. Mr. Jabre, who once survived an avalanche while skiing, directed his traders to exit the bearish futures trades, believing prices would rise.

“We can take off our hedges and be 100% long,” he told a colleague at the time. Without the hedge, which had reduced his fund’s Japanese exposure to 9% of his portfolio, Japanese shares became 15% of his portfolio, a sizable wager.

News over the weekend soon arose about problems at Japan’s Fukushima Daiichi nuclear plant, taking Mr. Jabre by surprise. Monday and Tuesday brought big losses in Japan and elsewhere. Trying to assess the impact of the damage, Mr. Jabre consulted four nuclear scientists.

By Wednesday, the Nikkei had dropped 13% in four trading days. Several of Mr. Jabre’s funds faced losses, one of them as much as 10% for the month. To his traders, Mr. Jabre appeared calm. He wasn’t.

“I felt horrible, but I don’t express happiness or frustrations,” he said. “Emotions are the enemy of a balanced person.”

During the 2008 U.S. stock-market collapse, Mr. Jabre bailed on his positions after 10% losses, enabling the fund to survive a market that felled some rivals.

Mr. Jabre reasoned that if radiation spread to Tokyo or a nuclear reactor exploded, authorities could close the Japanese stock market, freezing his shares for months. “If we touch negative 10%, we get very, very, very nervous,” said Mr. Jabre, who promises his investors to keep losses to a minimum.

Last Wednesday, Mr. Jabre cut positions in Japanese and global shares, eliminating his firm’s entire exposure to all stocks.

“If we’re wrong [and the market rallies], we set the firm back,” Mr. Jabre remembers telling a colleague. “But we’ll be alive to fight another day.”

“People like us tend to sell high and buy low; to sell low feels very odd,” he said. “But this is the firm’s style, even if there’s just a one-in-six chance of a nuclear explosion, we couldn’t take the risk.”

Two days later, however, Japanese and foreign monetary authorities took steps to stem the rise in the yen, helping shares rebound. By this week, the situation at the nuclear plant showed signs of stabilizing, bolstering global markets, though Friday brought new concerns of a radiation leak. The Nikkei index is up almost 5% since Mr. Jabre bailed. “We got whipsawed,” he acknowledged.

Mr. Jabre bought global shares on Monday of this week, but he remains cautious about Japanese stocks and the yen. It isn’t clear how recent events will impact Japanese companies, Mr. Jabre said.

He now is calling clients, who include wealthy investors and institutions, to explain the recent losses. He acknowledged he shouldn’t have turned bullish so quickly after the earthquake. As for bailing out early, “it’s the first time a nuclear meltdown was at risk,” Mr. Jabre said. “It was hard to assess the consequences.”

The rebound in U.S. shares over the past week has helped his funds. A convertible fund that had dropped 5% during the worst of this month’s trading now is slightly positive for the year.

But the JabCap Global fund, one of his biggest with $1.5 billion in assets, remains down 7% this month and has lost 3% this year, worse than most competitors. Most of his investors understand his recent moves, Mr. Jabre said. Few have asked to pull their money and some are adding more cash, he said.

“The reason we’re still around is our risk management,” he said. “We’re telling clients that we’ve lost six months of performance, but we’ll be back.”

Write to Gregory Zuckerman at

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