How disease spreads in the global hedge fund pre-school
Aug 27th, 2007 | Filed under: Hedge Fund Industry Trends
Anyone with school-aged children knows what September brings each year: colds. The common cold runs rampant through most schools beginning from the first days of the year. Seems the little whippersnappers regularly share toys, crayons, calculators and even their lunches with the sickest kid in the class.
The trouble is, we never know exactly who brought the cold to school in the first place. And as a result, we don’t know who to blame. Sure, we have our hunches. That little Evan Davies never washes his hands. Molly Abramsky is always dropping her lunch on the floor. Davie Schneider - that little wiener - spends most of the day with his finger planted firmly up his nose!
Caught off guard by the onslaught of foreign germs in September, our kids’ immune systems capitulate. But as the year wears on, they seem better able to resist the frequent cases of sniffles brought into class. Still, when someone comes into class with a violent hacking cough - no matter what time of year - that’s a whole other story.
As this New York Times piece on the weekend illustrates, hedge fund managers may not be that different from pre-schoolers. The Times cites a study (available here) showing that hedge funds ”contagion” makes kindergarten look like child’s play.
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[…] All About Alpha on how recent hedge fund contagion resembles a virus in a nursery school. […]
Thanks for an interesting posting. One question: You stated that the study on hedge fund contagion cited in the New York Times was “updated last month.†I’ve corresponded with the authors of the study, who confirmed that the study was last updated March 2007, not July 2007. Do you have another source †one that is more reliable than the authors of the study †for your statement that the study was updated last month? Thanks.
I like this analogy and the chart. I said much the same thing, but without the interesting analysis. See my quote in Jack Willoughby’s Barron’s column on August 25: “Richard Bookstaber, author of A Demon of Our Own Design, sees a market prone to upset because of excessive leverage and the complexity of derivatives. Says the former risk honcho at hedge-fund giant Moore Capital: ‘These CDOs spread the problem like a kid spreads a cold to other kids at a birthday party.’”
Michael, Thanks for the heads-up about the release date of this paper. Not sure what sources you are refering to that would be more reliable than the authors of the study. So I would suggest we go with the authors on this one. Apologies for any confusion that may have resulted from this apparent error on our part.
Rick, Thanks for the comment. No question about it, we should all stop our kids from giving CDOs as birthday gifts!
For the reference of others, here is the link to the Barron’s article to which Rick refers:
http://online.barrons.com/article/SB118741403459301888.html
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