New York Post latest to butcher hedge fund risk story
May 7th, 2007 | Filed under: Hedge Fund Industry Trends, Media Coverage of Hedge FundsWe’d rather not beat a dead horse, but the misinformation born out of the initial coverage of the Fed’s hedge fund report last week is spreading. In today’s (Monday’s) New York Post, for example, Fox News’ Terry Keenan writes that the Fed:
“…waved a red flag about the growing risks in the $1.4 trillion hedge fund industry. In fact, the Fed said the risks facing the financial system were the highest since the Long Term Capital crisis of 1998.”
We could find no such warning in the article we covered on the weekend, and have subsequently managed to find no such warning from any other sources. As we have written, the Fed said hedge fund strategy cross-correlation was coming off post-LTCM highs, but that correlation…
“…has a notable drawback…the correlation of different funds’ returns may rise either because the returns have moved more closely together (their covariance has increased) or because their volatility has fallen. As this article shows…an increase in the comovement of dollar returns was the leading cause of rising correlation in the 1990s, but a decline in overall volatility explains the recent rise.”
“…high correlations of returns generally do not precede increases in volatility in the hedge fund sector, but high covariances among hedge funds do.”
Keenan alleges that the Fed warned: “Similar trading strategies can heighten risk when funds have to close out comparable positions in response to a common shock.”
But that quotation explained why a high level of similarity could be problematic. It was not an actual conclusion of the report. The Fed’s actual words were:
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During the London terrorist bombings, CNBC reported hedge fund managers claimed their liquidity held up markets.
In Barron’s, Randall Forsyth,mentioned his April 26th article, “Global Capitalists Governments Compete with Capitalists”. If Japan and China began to run their own hedge funds, its very likely they could copy existing manipulations very destructively. Without disclosure, the free market is at high risk.
[…] The report cites a NY Fed report that the media erroneously and prematurely interpreted as evidence of high correlation. As these three postings showed, that report actually pointed somewhat ironically to low volatility as the reason for this statistical phenomenon.   […]