John ‘Big Idiot’ Devaney Sells Yacht as Subprime Losses Hit Hedge Fund

We start today on a sad note.

Mr. John Devaney is an idiot. But without idiots, the graveyards and barrooms would be empty; and then, what kind of a world would it be? Thank god for them all.

And so, we sympathise when an idiot runs into trouble…fully aware that we could be the next ones to do so!

Poor Mr. Devaney is selling his 142-foot yacht for $23.5 million. But that is not the source of the discomfort. There are only two happy moments in a boat-owner’s life, or so it is said – the day he buys his boat…and the day he sells it. So, may Mr. Devaney will probably enjoy getting rid of the thing.

Especially since the boat’s name is “Positive Carry,” and therein lies a tale. For the reason that Mr. Devaney is in the news is precisely because his carry went negative…and his hedge fund, United Capital Markets, went into losses.

This is not the first time the man has made the news. He was quoted in the papers as describing people who took out subprime mortgages as “big idiots.” A moment’s reflection might have brought the opprobrium closer to home, for Mr. Devaney’s fund was buying up these big idiots’ subprime mortgages, on a grand scale.

That is the problem with today’s markets; it is so hard to figure out who is the biggest idiot. Surely, the fellow who buys a trashy barrack in a bad part of town using a subprime ARM is an idiot. Buying more of a house than he can afford, he’s just asking for trouble. But so is the fellow who buys a whole inventory of these packaged mortgages – collateralized debt obligations – asking for trouble. If they were bad for the borrower, sooner or later they’re going to be bad for the lender too. Making a loan to a guy who can’t pay you back has never been good business. But then, in order to buy more CDOs than he can afford, the hedge fund sharpie borrows money. Often, he’ll get even more leverage by means of the carry trade – borrowing yen or Swiss francs at a low rate and using the money to buy high-yielding subprime debt. As long as everything works out as planned, he’ll have “positive carry.”

And then, along comes an investor who puts his money in the hedge fund! And, get this, he pays the manager fees of “2 and 20” for the privilege of taking part. Is this guy an idiot, or what?

The mathematician, Daniel Bernoulli, described why he was sure to be a loser, hundreds of years ago. On even odds, 50/50, if you keep betting you’ll win sometimes and lose sometimes. If you go double or nothing each time, sooner or later you’ll be wiped out.

If the hedge fund manager were merely making 50/50 wagers…he’d win some, lose some. Each time he won, he’d join you in the winnings. Each time he lost, you’d be alone. Eventually, you’d have nothing left. But hedge fund managers have an incentive to take much bigger gambles. Because, the bigger the bet, the more he stands to win…and you stand to lose. If it goes right…he’ll get 20% of the pot. If it goes wrong – which it will, sooner or later – you’ll take all the loss.

We don’t know exactly what went wrong with poor Mr. Devaney. Sounds like he was a bigger idiot than most; he seems to have invested in his own preposterous fund. Word is, he’s put his house in Aspen up for sale too. For only $16.25 million, all 16,000 square feet of it can be yours.

What happens to these guys? Our friend, Nassim Taleb, took up the question in Vancouver.

“Don’t worry about them,” he said. “A hedge fund manager who blows up his fund isn’t out of work for long. He just takes a vacation. The bigger the blow-up, the longer the vacation. Maybe he goes for a hike in the Alps if it is a small fund. A medium fund manager who blows up goes to climb Kilimanjaro. And a really big fund manager has to go to the Himalayas. But he has already sent out his resume, telling of all the great success he has had…blemished by only one mistake. Usually, he gets a call to come back to work at another fund before he ever leaves the base camp.”

So…don’t worry about the idiots. As long as the credit boom is still going on…Mr. Devaney will be all right.

But don’t worry, dear reader…it’s only money.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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7 Comments on "John ‘Big Idiot’ Devaney Sells Yacht as Subprime Losses Hit Hedge Fund"

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Sean Healy

I also think the fee structure, which usually is based on Funds Under Management, is too much of an incentive for the funds to borrow and be dangerously leveraged.
During a time of raising interest rates, adverse moves could spell disaster IMHO.

Uncle Tom

It is obvious that you don’t know the real John Devaney. John is a savvy lionhearted entrepenaur that cares for all. You are obviously are jealous of success. The tide is turning for the market recovery.
Bill Bonner needs to take a look in the mirror and see who is really there!

Mike Shanley
When you start calling Mr. Devaney names you lose all credibility. What do you truly know of Mr. Devaney and what kind of person he is? “Nothing” For if you did you would know him and his family as generous and caring people. You are just another moocher who capitalizes on the hard times of others. If you knew what this man has done for his community, charities and everybody who has crossed his path, you would not call him names but join in with those wno support him in both good and bad times. Mr. Bonner begin your day… Read more »
Jose Bahamondes

Its very unAustralian to kick people to the ground. Do you have a hatchet to grind? I bet you were one of his suckers when he was successful.

Peter Eckel

Clearly this was written some time ago, but nevertheless, you don’t have a clue. This seems more jealousy driven than anything. Devaney is a savvy and sophisticated bond trader. Period. Devaney also is a hell of a guy!


Wow, since he’s such and idiot and you’re so brilliant you must have made a fortune on the short side eh?
You’re the idiot.


Wow, look at all the Devaney supporters. I bet Tangelo has his, too.

Lesson: Even pigs feeding at the trough have their supporters.

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