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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: russwinter who wrote (79987)	3/14/2007 11:04:02 AM
From: Real Man	Read Replies (2) of 110194

Russ, I heard about 1/3 of all hedge fund $$$ is pursuing LTCM strategies now, described here en.wikipedia.org These are 1) carry trade 2) short volativity (selling puts with delta hedging) 3) short spreads So? My guess some of these may be blowing up. We all know what LTCM did, the game now is 300 times larger. I'm afraid, a meltdown is a possibility. So, I don't buy your theory that the Pig Men will initiate it - the Pig Men are definitely engaged in the very same games. It will be a blow-up, Mr. Margin call for some weaker funds that initiates it, and the decline that unfolds could be extremely sharp. If it does pass some critical point, then it feeds upon itself, as the very same computer models start selling. Due to the size of the market, it is unlikely that the Fed will be able to stop it, once the critical point is passed. These models are Gaussian arbitrage models. The natural "tails" in the distribution were eliminated by continued Fed liquidity injections, making these games very unfair to other market participants. Lack of liquidity is what usually causes these derivative models to fail.

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