5.19.2006

Hedge funds at play

The stock market has taken a pounding this week. Financial Times says it may be hedge funds or their banks panicking to unwind leveraged bets:

The recent sharp falls in stock markets appear to have been exacerbated by an unusual wave of derivatives activity on the part of hedge funds and big banks, traders yesterday indicated.

In particular, some banks and big investors appear to have been forced into selling large amounts of equity futures because they have been acting as counter-parties to large, leveraged bets on the direction of stock market volatility in recent months - and these bets are now unravelling because volatility has increased sharply.

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