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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (1661)	10/30/2005 5:53:24 PM
From: FiveFour	Read Replies (2) \| Respond to of 218068

London was great. Some random thoughts -Hedge fund modeling has continued to increase in complexity in the last two years, all modeling seems to use real historical volatility rather than attempting to forecast future volatility. -Hedging/arbitrage among similar but not identical products/markets is widespread. Funds are betting that their correlations will hold stable over time. (In a previous lifetime, we used to call this as a “Texas Hedge” or a mismatch the trade is not hedged but actually holding 2 separate positions that can both move against the trader.) I guess things are different now. -Financial models don’t follow the laws of physics and will eventually fail, statistical relationships and correlations won’t hold during a disruptive event or a crisis. -One person estimated $1.3 trillion under Hedge Fund management (could that be correct? venture a guess as to what that levers up to?) -A quant analyst mentioned his fund is picking up nickels on the track of an oncoming train. He does not seem too worried about it, because everyone is doing it. These are very bright guys, they know perfectly well that their hedges may be flawed, but they are content to pick up their nickels and hope they can get off the track just in the nick of time. Some of them undoubtedly will. -Much of the fund liquidity is short term, i.e., one to 3 month commitments from customers and this short term liquidity is being used to fund some significant long term, illiquid trades. I heard a disaster story from one manager forced to exit a long term (5 year) illiquid trade due being funded by short term funds. I wonder what will be the impact of exiting the illiquid long trade when some of the short term liquidity dries up? -One guy there started one “up fund”, one “down fund”, and one “neutral fund”. I guess in a few years he will have created a great track record and be a hero in at least one of these 3 categories. -Some of the traders are using mean reversion to trade large option volatility positions, shorting options when volatility is high and repurchasing the options when volatility is low. But, as we all know, the mean is always moving and sometimes, prices don’t revert to the mean -The funds are actively doing dispersion trading in options, i.e., shorting a large basket of options against a long trade in the index’s options, pocketing the small differences in volatility. But unfortunately, even a large basket does not an index make, so they are trusting that their correlations will hold on these similar, but not identical trades -One derivatives manager had an interesting story about put prices that increased against his large short put position at the same time the underlying price was increasing -VIX futures have low liquidity and there seems to be little confidence in how VIX futures will reactive relative to the VIX index during a crisis. Some seem to think that VIX futures would trade significantly lower than the VIX index during a disruptive event or crisis. Others think that there might not be a quoted market available in the futures in a crisis, making it impossible to exit a position. Others think that the bid/ask spreads would be outrageous with poor liquidity, making it difficult to exit. -There doesn’t seem to be any serious hedging occurring using VIX futures -The GM convertible bond/ equity losing paired trade publicized earlier this year was discussed. Some funds are holding similar trades in other troubled companies. -There seems to be some expectation that volatility will stay low for 1 or 2 years with a theory that as interest rates increase, and begin to impact corporate earnings, only then will there be an impact on real volatility. Care to venture a guess as to where future volatility levels will really be?