Describe in your own words, Peleton's winning strategy in 2006.
Peloton’s winning strategy was effective in 2006 and allowed Peloton Partners to become one of the top hedge funds in the country. Ron Beller, the head of the company bet against the United States housing market. Before the subprime crisis hit the country, and people started to default on their mortgage, Beller was able to earn a healthy return by taking a short position on the housing market. The objective was to invest in the mortgage as the banks were issuing mortgages to a large number of people irrespective of their credit history. The investment in mortgage paid around 80% return in 2007
.Describe in your own words how Peleton went bankrupt. What role did liquidity play in Peleton\'s failure? What role did UBS play? How was Ron Beller trying to save the fund? Why didn\'t it work? How might gaining access to additional liquidity have helped? What arguments do you think Ron Beller was making to its financing banks in order to convince them to help?
Ron Beller misunderstood the prices of highly rated mortgage securities and believed that the prices were unfairly punished after the crisis. So, he decided to lever up the investment by nine times. The investment took a severe hit when Alt-A-backed AAA securities fall by 10 to 15 percent. This happened when UBS announced that the bank owed $21.2 Billion worth of high-rated securities. Thus, UBS gave the market the signal that it is going to sell these securities. To save fund, Ron Beller asked the investor for more funding, liquidate all the positions that could generate cash and asked banks to delay margin calls. This did not work because banks were dealing with their mortgage losses. The additional funding could help the firm to avoid illiquidity and hence bankruptcy.
