Friday, January 28, 2011

Dan Shak's Hedge Fund Nearly Blows Up the Gold Market

By Pauly
Los Angeles, CA

Dan Shak almost caused a tsunami in the gold futures market.

This sounds like a story for Tao of Fear. But, it's real life and my Wall Street world has just collided with the poker world. Enter... Dan Shak.

For someone who is an investor and Hedge Fund Manager like Dan Shak, $10,000 poker tournament buy-ins are peanuts to the millions that hes been gambling on in gold futures.

"Must use poker winnings to buy more gold!"

There's an inside joke among poker media that sometimes Shak randomly set up his laptop in the pressbox during tournaments. On his breaks, he sprinted to the laptop, checked his spreads, and randomly barked orders into his cell phone, "DEEEZ! DEEEZ!"

Because I was one of the rare members of the poker press who used to work on Wall Street, I knew that Shak wasn't crazy...he was simply attempting to buy December futures contracts (the abbreviation is "Z" but it's also known as "Dec" or pronounced "deese" instead of "deck"). Alas, my snarky colleagues exaggerated his trade lingo so much so that Shak's nickname was often "Deez." Oh, and you don't want to know the not-so-charming nickname that we have to his ex-wife Beth. I'm afraid if I reveal that, she'll try to sue me for slander with a mergers and acquisitions attorney and shut down Tao of Poker .

During one recent tournament, I glanced at Shak's laptop and noticed his was trading gold futures, I asked him, "How you doing today?"

Shak told me his chipcount in the tournament. I guess Shak had no clue that I used to be in the business, or rather, he didn't want anyone to know what he really did for a living.

Before he started his hedge fund, Shak was a trader on the floor of COMEX located on the 8th floor of the former World Trade Center. That's exactly where I got my start as a runner and later as a clerk as an internship in high school, and later as a summer job just before I started college. I never went back to the trading floor in subsequent stops on Wall Street (post-college, I trained as a bond trader, and then returned post 9/11 as a stockbroker).

Shak's hedge fund, SHK Asset Management, at one point controlled almost 10% of the total U.S. futures market and worth almost $850 million. It's important to point out that futures contracts cost a small percentage of the actual price of the future. All of these contracts were bought on margin. When the price of gold tanked at the start of 2011, Shak was going to be on the hook for a massive loss. Like a smart poker player, he got in over his head (look at in as a hold'em hand and by the turn with most of his stack in the pot, he knew he was drawing to a one-outer or possibly drawing dead), so he folded his hand. Closing his trade cost somewhere around $7 million. Rumor suggested that the board at COMEX forced him to cut his losses, but in an interview, Shak was stern when he said that he got out on his own when he was down 70%.

It's also important to note that Shak made a spread trade -- essentially betting on both sides (long and short positions) of the gold market.

The Wall Street Journal can explain it better:
It isn't an outright bet on gold prices, but rather on the degree of movement among different contracts. The fact that the sale came from a spread trader, rather than a gold holder, could put some investors' minds at ease.

Spread trading often flies under the radar of regulators and exchanges, as it is regarded as involving little risk. Therefore, traders are able to use high leverage to command a big number of contracts with only little capital.

For example, with as little as $135, a trader can control a spread trade, which is nominally valued at more than $260,000 at today's price.

In comparison, traders need to put up $6,751 to invest in one futures contract. Mr. Shak's positions were extended as far as December 2015, according to exchange data.
I got tipped off on this story by my friend Marissa. You can read more about the saga from the Wall Street Journal's article Small Gold Trader Makes Big Splash: Daniel Shak's Aggressive Bet Grabbed Sizable Chunk of Contracts, But Prices Fell and Wager Went Bad.

The gang at Zero Hedge even took notice and wrote a post: Meet The Man Behind The Liquidating Hedge Fund That Blew Up The Gold Market.

One of my favorite Wall Street blogs, Clusterstock, also weighed in on the situation This Poker-Playing Hedge Fund Manager Sent Shocks Through The Gold Market Last Week.

The best line in all of this, which I hear from degenerate gamblers (poker, craps, sports betting, whatever) all the time, is what Shak told the Wall Street Journal: "This is not career ending. I'm not stopping trading."

Talk about a trader who has a set of titanium balls! That's what I love about Dan Shak -- he made a ballsy trade, it went south, he cut his losses, shrugged it off, and wants to get back in the game.

Instead of dicking around trying to get his chip count, maybe I should ask Shak if I can have a job at his hedge fund?


  1. Wow... Shak put his Upper East Side apt on the market as well. Nice terrace, but I think I want a better view for $7.5M.

  2. Nice wrap up. What does it do to the Silver futures (and physical silver) I see people buying up?

  3. just to clarify - he had calendar spreads on (ie, long Dec, short March, although he was probably the reverse - so he wasn't exposed to the directionality of gold. We know this because he couldn't have controlled an$850MM position with only $10mm in capital if it wasn't spreads.

    you also missed the best quote from the WSJ article:

    "Discussing his business before the poker tournament, he told an Australian newspaper that he trades with the biggest gold and metal producers.

    "I am one of the very few people willing to sit down and make a market in any spread transaction. It's a niche market, but it's my niche," he said."

    ummm.. actually, Dan, i guess it's NOT your niche... empirical evidence would indicate...

  4. you guys see this new poker clothing company btw? finally some cool stuff for poker ...