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Strategies & Market Trends : Hedge Funds

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To: Marty Rubin who wrote (3)	9/10/1998 9:42:00 PM
From: Marty Rubin	Read Replies (1) of 120

Why the Computer Models Misfired (Continue of Cover Story --Marty) LACK OF LIQUIDITY When a computer program pinpoints a profitable hedge, the assumption is that there will be a buyer on the other side of the transaction when the deal is settled. But the turmoil in Russia and Asia so unsettled the markets that buyers disappeared. BREAKDOWN OF PATTERNS Usually, traders can hedge their bets by investing in many different geographical regions. But in recent weeks, the patterns have become synchronized, so that a decline in one region would no longer be offset by a rise in another. LIMITED APPLICATION Models that may be useful for countries with well-developed markets don't work well in smaller markets. MISSING STREET SMARTS Many mathematical geniuses with little practical experience in the markets have been hired on Wall Street. ''Black box'' models put on autopilot, without review or input by seasoned traders, can fail. POLITICAL RISK The models failed to assess realistically the risk that Russia would backslide so abruptly on the road to capitalism. Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved. (To read a commentary on this subject by one of my favorite guys at Business Week, go to #reply-5719287)

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