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...An article in Wednesday’s Financial Times, Unbound, by Gillian Tett, discusses how trading in credit derivatives generally and in the iTraxx contract in particular has become more important than the bond markets. Because my brain is a bit fried due to jet lag, I will be brief and hopefully won’t oversimplify, although I will probably […]
Read more...Two major types of hedge fund strategies, namely event-driven (Newspeak for risk arbitrage) and statistical arbitrage (typically, very high volume trading to capture and correct anomalies in prices relationships in various markets, such as among stocks bonds, or derivatives, or across markets) are having trouble. It isn’t yet clear how far reaching these problems are. […]
Read more...The era of lax lending is inflicting damage on one of its biggest perps, namely, investment banks. Wall Street firms, overeager to win funding mandates from private equity firms, agreed to terms that were very much in favor of the private equity firms. And now the LBO firms are holding them to their financing commitments, […]
Read more...If credit default swaps prices are a valid indicator, the fixed income markets are regrouping. Prices, which spiked up earlier this week on panic buying of risk protection, have eased off. However, while this decline is a good sign, note that it does not equate (yet) to an improvement of liquidity in the riskier sectors […]
Read more...John Kay, in an interesting but somewhat discursive opinion piece in the Financial Times, compares the structuring of complex securities to alchemy, with all its negative connotations. He points out that the elaborateness of the models has the effect of obscuring risks that would be more apparent otherwise, namely, that if you believe markets are […]
Read more...A draft of a paper, “Innovations in Credit Risk Transfer: Implications for Financial Stability,” by Stanford’s Darrell Duffie, investigates ” the design, prevalence, and effectiveness of credit risk transfer,” with an eye to implications for the financial system. The paper is worth reading for those seriously interested in the CDO/CLO markets, and sets forth a […]
Read more...Floyd Norris has an article in today’s New York Times, “Market Shock: AAA Rating May Be Junk,” that is enough off the mark to be annoying. The problem with the article isn’t so much inaccuracy as superficiality. Norris points out correctly that a lot of buyers are waking up to the unpleasant reality that that […]
Read more...News reports on a Fitch study on credit default swaps came out yesterday, and I saw it reported in the Financial Times and decided to pass, but other elements of the report have been picked up elsewhere, and I changed my mind. Basically (surprise!) leverage cuts both ways. The FT cited the results of a […]
Read more...Jamie Dimon, CEO of JP Morgan, fesses up that commercial banks like his have overdone it on LBO debt and are likely to take writedowns. At this point, this statement is no revelation. The main point of Dimon’s remarks is to reassure investors that the prospective losses are not significant relative to JP Morgan’s capital […]
Read more...I’m sure you know the old saw about the drunk looking for his keys. A cop comes across a drunk crawling on all fours under a street lamp. The cop asks what he is doing. The drunk says he is looking for his keys. The cop looks about and can’t find any keys, and asks […]
Read more...The Wall Street Journal has mentioned in passing that investment bankers have been stuck with hung LBO financings, the result of investor resistance to the terms on offer. This Bloomberg story highlights the degree to which the Wall Street players have been left holding the bag. Unless there is an unexpected change in sentiment, the […]
Read more...John Authers of the Financial Times thinks the markets got a lucky break this week, and deferred a so-called Minsky moment, which he discussed in a noteworthy piece earlier. By way of background, economist Hyman Minsky observed that creditors become more lax about lending standards during times of stability. He divided borrowers into three types: […]
Read more...Bloomberg reports that Moody’s has dropped its ratings on 399 subprime related bonds and is reviewing ratings on another 32. Standard & Poors had announced earlier in the day that it is preparing to cut ratings on 2.1% of the bonds that have subprime exposure, or roughly $12 billion out of a universe of $565 […]
Read more...Apologies for the reliance on the Financial Times today, but it happened to have a lot of good material. The CEO of Harvard Management, Mohamed El-Erian, writes the occasional opinion piece, usually for the Financial Times, and I’ve always featured them because they are consistently thoughtful and well-argued. I’m highlighting his latest FT piece, “How […]
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