Recently, we’ve noticed a new theme among economics writers: Extreme Measures. Commentators have looked toward the end of the road we are on and fear it leads to a precipice. Hence the calls for radical course correction. Paul Krugman and Bill Gross of Pimco, each of whom proposed large scale rescues of homeowners at risk […]
Read more...A gut-wrenching two weeks in the credit markets have been capped by unprecedented moves by central bankers. The ECB’s offer of an unlimited infusion to member banks the week before last was followed last Friday’ by the Fed’s discount rate cut, which included stern warnings that those who needed it better use it and a […]
Read more...It’s summer rerun time. By happenstance, I came across a May post, which referred to a Federal Reserve study that had found that risks of hedge funds pursuing highly correlated strategies appeared, by some measures, as high as before the LTCM crisis. We had thought the Fed might be making a mistake in dismissing its […]
Read more...This has been an all-round bad news sort of day. And of the bad news, the most troubling is that the carry trade is unwinding. For those of you not familiar with this phenomenon, it consists of borrowing in currencies that have low interest rates and then investing the proceeds in countries and assets that […]
Read more...Fragility seems to be the word on everyone’s lips today. As reported in the Financial Times, UBS market strategist William O’Donnell said that the commercial paper markets had dried up and, “Now the buyers are only interested in Treasury bills.” Overnight, Rams, an Australian home lender that, while not exposed to US subprime, had been […]
Read more...According to Bloomberg, Moody’s has altered investors to the possibility of a repeat of the 1998 Long Term Capital Management hedge fund crisis. We should be so lucky. As we have said before, the LTCM crisis has been widely, and in our opinion, mistakenly seen as a vindication of the workings of the financial system. […]
Read more...Nouriel Roubini, on his RGE Monitor, discusses the distinction between risk (variability in outcomes that can be estimated) and uncertainty (unknown or unmeasurable outcomes). Risk can be priced; uncertainty can’t (or at least can’t be priced by rational agents). Roubini argues that part of the panic in the markets stems from the fact that investors […]
Read more...When it rains, it pours. Here many hedge funds are braced for investor redemptions today, just when some banks are starting to refuse to lend against subprime holdings. Now this story isn’t as dramatic as it might seem. It appears that only a few banks have stopped lending against subprime-related debt. And the ones named, […]
Read more...Andy Xie, who until last year was Morgan Stanley’s chief Asia economist (he apparently made himself unpopular by being too candid about Singapore), gives a blunt critique of last week’s liquidity infusions by central bankers in “It’s time for central bankers to stop bailing out markets” in the Financial Times. Xie’s conclusion is that the […]
Read more...On August 12, in a post titled, “The Subprime Meltdown Hits Quant Hedge Funds,” DeLong summed up the quant attitude: “Our strategy is fine. We were just hit by a sixteen-standard-deviation event.” “Then it didn’t happen: the universe isn’t old enough for even one sixteen-standard-deviation event to have ever happened.” Tails are fat. From an […]
Read more...Goldman, in a brilliant bit of legerdemain, invested (along with partners such as CV Starr and Perry Partners) $3 billion into its troubled quant fund Global Equity Opportunities. From its press release: Many funds employing quantitative strategies are currently under pressure as recent conditions have resulted in significant market dislocation. Across most sectors, there has […]
Read more...The New York Times, among others, endeavored to shed more light on why quantitatively oriented funds like Global Alpha (down 26% YTD), Cliff Asness’s AQR (down 13% in August) and James Simon’s Renaissance Technologies (down 7% YTD) are doing so badly. Short answer: these funds rely on models that look at statistical norms, and these […]
Read more...Live by the sword, die by the sword. Bloomberg reports that Goldman’s formerly $10 billion hedge fund, Global Alpha, is down 26%, following a decline last year of 9%. Although there have been rumors of big losses at Global Alpha and elsewhere, this news was posted on Bloomberg after the markets closed. One has to […]
Read more...As readers doubtless know, a nasty day in the markets yesterday was followed by distress overnight as the Japanese central bank injected funds into the marketplace and the European Central Bank added liquidity a second day, following an unprecedented, unlimited injection Thursday. The Dow opened down over 100 points, and due to a spike up […]
Read more...The ECB made an unprecedented offer of unlimited funds to member banks as the demand for cash soared as a result of Paribas freezing redemptions of three funds. Mind you, these funds only had $2.2 billion of assets, far less than the troubled Bear hedge funds. The reaction seems disproportionate, unless you factor in that […]
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