Dec 4, 2008

Hedge funds: short on original ideas

A month has passed since the massive short squeeze on Volkswagon, which briefly made the company the most valuable in the world (by market cap). As hedge funds have reported results since then, it has been interesting to note that many of them were playing this same trade and were caught trying to close out their positions at the same time (they took a bath), even funds whose established strategy had nothing to do with German automaker equities. Why would

This presents a problem for an endowment or pension fund (or even a fund of funds) that diversified its investments across several HFs that are supposed to play in uncorrelated market spaces. When things go bad, they go bad across several HFs at the same time as correlation = 1.0 just when it hurts you the most. Not to mention that it seems antithetical to the original premise of HFs - that they're supposed to be hedged against risk in one position by an offsetting position somewhere else.

Will hedge funds stop telling all their friends about their trades to encourage massive piling-on?Unknown. But it's an interesting contrast to private equity shops that try to keep their deals as quiet as possible until the last possible moment, lest more bidders show up at the auction.

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