Tuesday, September 18, 2007

Freight and carbon credits help hedge funds

Only three strategies adopted by hedge funds appear to have survived unscathed the rout of the sector last month, as the ‘absolute return’ industry again mostly failed to protect investors against market turmoil.

The nascent freight and property derivative sectors and carbon credit trading proved resilient to the wild swings in equity markets in August with the small funds specialising in the areas coming through well.

However, the poor performance of the rest of the industry – in which more than two-thirds of all funds lost money – has left many investors wondering what happened to the hedge fund aim of not moving in line with other assets or each other.

“Hedge funds didn’t do what they say on the tin,” said one senior hedge fund manager last week. Much the same happened in May last year when hedge fund systems designed to avoid their being hit by plummeting markets did not work.

The problem, according to prime brokers and analysts, is caused by the hedge funds themselves. “There’s one thing that comes out of all these shocks and it is really part of the increasing power of hedge funds,” said the head of European prime broking at one Wall Street bank. “When they are going through a challenging return environment, a lot of their assets are more correlated than you might have expected.”...MORE

From the Financial Times

That would be a bingo. And points up the silliness of the comment from Goldman Sachs CFO:

“We were seeing things that were 25-standard deviation moves, several days in a row,” said David Viniar, Goldman’s chief financial officer. “There have been issues in some of the other quantitative spaces. But nothing like what we saw last week.”

I haven't posted on Viniar's "25 SD moves" yet, I haven't figured out if he was B.S.ing himself, his investors or the world at large. B.S. it was, however.