> anyone know if he is accurate in reporting that "investment strategies that > supposedly were well hedged, so that losses in one sector would be offset by > gains in another, turned out to be 'correlated', so that they all went down > together"? I wasn't able to confirm the information on my own.
Sigh! How many of these failed negative correlations and six standard deviations events does it take before these guys admit their models are broken, and anyone who uses those models are guilty of stupidity or dishonesty?
It's quite possible that a lot these "hedge funds" are -- like the late Long-Term Capital Management -- not really hedging but are instead speculating. After all, these funds aren't regulated, so they
There is an oft-repeated claim that it is very hard to distinguish between a legitimate hedge and a speculative investment. I suggest an easy and simple test: if you are leveraged, you are speculating. There is no such thing as a "leveraged hedge".
However if there is systemic risk, hedging doesn't abolish risk. Nor does diversification or insurance. (It's like when a big hurricane hits, undermining all the insurance companies involved.)
Is there not a severe moral hazard problem here? If I ran a hedge fund I'd want to maximize systemic risk so that my fund becomes "too big to fail". Is this the reason for at least some financial mega-mergers (e.g. JP Morgan + Chase)? --raghu.
