What a difference a couple of months (and a few cups of coffee) makes

8 October 2007

“The market volatility of late summer, which included a huge drop in stock prices from August 6th to August 9th, prompted the financial press to look for a scapegoat. Several journalists and commentators settled on quantitative hedge funds, or ‘quants,’ as the culprits. But did the media get it wrong? New research suggests so.”  

Caveat Prognosticator: How the financial press may have gotten the quant story wrong 
(The American, October 8th)

What a difference a couple of months makes.  On this 2 month anniversary of the infamous August 9th, we look back on the summer’s screaming headlines and compare them to several from this week which seem to herald a very different world.  It seems there are always two sides to hedge fund stories.  In fact, we believe the way some of these stories have so dramatically evolved lends support to our goal of trying to provide a platform for “sober second thought” on developments in the hedge fund industry.

• Old News: How the ‘Quant’ Playbook Failed (August 14th)
• Update: Why Quant Funds’ Numbers Still Compute (October 8th)
    
• Old News: With blood in the water look to bigger fish (August 17th)
• Update: Hedge Funds Bounce Back (October 8th)
    
• Old News: Hedge funds outflows hit 7-year high in July (September 4th)
• Update: Report of hedge fund outflows was wrong, firms say (October 3rd)
     
• Old News: Subprime Damage to Hedge Funds May be Widespread (July 19th)
• Update: Hedge funds were prepared for credit crisis (October 8th)

And a little over a week ago, The Edhec Business School found that European leaders may have also been a little quick to point the finger at hedge funds over the summer.  In a report called “Three Early Lessons from the Subprime Lending Crisis”, Edhec argues that criticism of hedge funds diverts attention from what they describe as bigger problems with the European regulatory environment. 

Says the report’s introduction:

“European leaders, eager for an explanation absolving them of responsibility, have once again laid blame on the seemingly detrimental role played by hedge funds in this summer’s crisis. This crisis is the result of a sudden fall in asset prices, combined with increased aversion to risk on the part of investors.

“To suggest that hedge funds are to blame for this crisis is simplistic but tempting, as their speculative, unregulated, and opaque nature make them easy targets—all the while, more delicate market and regulatory issues are avoided.”

And here are the “three early lessons”:

• Lesson one: hedge funds are not responsible for the current financial crisis
• Lesson two: the crisis is linked not to under-regulation but to over-regulation
• Lesson three: regulation in the works will increase the risk of market illiquidity 

Sure, stories evolve over time.  But these early media storylines have evolved so much that they call into question dramatic new stories like these ones from today’s news:

• ‘Hedge fund collapse is on the way’ 
• HFs May See Net Outflows?

So check back with us in another 60 days to find out if hedge funds are collapsing (or at least if they have seen net outflows).  Maybe they will.  Maybe they won’t… But at least we’ll all be a little more sober by then. 

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4 Responses to “What a difference a couple of months (and a few cups of coffee) makes”

1. Tuesday links: brewing a beeropoly « Abnormal Returns Says:
   October 9th, 2007 at 12:38 pm

   […] On the evolution of the quant hedge fund story. (All About Alpha) […]

2. Bob Kulperger Says:
   October 10th, 2007 at 9:39 am

   Enjoyed the posting as always, although when Giles Conway-Gordon of $65 Million Cogo Wolf, a fund of hedge funds, predicts the doom of hedge funds, we really should all listen.

3. MarketBeat Blog - WSJ.com : Blog Roll -- Second Thoughts About Quants Says:
   October 10th, 2007 at 10:10 am

   […] All About Alpha compares the headlines about hedge funds from two months ago and the headlines about hedge funds now and finds some vast differences. “What a difference a couple of months makes. On this 2 month anniversary of the infamous August 9th, we look back on the summer’s screaming headlines and compare them to several from this week which seem to herald a very different world. It seems there are always two sides to hedge fund stories. In fact, we believe the way some of these stories have so dramatically evolved lends support to our goal of trying to provide a platform for ’sober second thought’ on developments in the hedge fund industry,” they write. […]

4. A.Susilovic Says:
   October 15th, 2007 at 6:56 am

   Thank you helicopter Ben for rescuing the Quant industry…