Hedge Funds, Terrorists, and Politics: The Day of the Beast

6/6/06 (666).

Having worked in a Hedge Fund during the collapse of Long Term Capital Management (LTCM), I am nervous about how the large Wall St. Banks and Hedge Funds have so much exposure (and leverage) in highly illiquid assets. Brazilian and Indonesian bonds, credit-default swaps and catastrophe bonds ... In 1998 it was Russian bonds among other things. Everyone knows that correlations will rise when the sh**t hits the fan, and that everyone will want to unload their positions at exactly the same time. I hope the lessons from 1998 are built into these highly quantitative risk management and trading systems. Having built trading and risk management systems myself, it is really hard to model the velocity in which these crises occur. The LTCM trades were eventually profitable, but you had to be able to ride out a few months to see the arbitrage trades go as the models said they would. For a lot of these smaller hedge funds and some larger banks, I have a feeling that large exposure + leverage will mean things will get really ugly, at some point. Businessweek has a great overview.

I think Westly will win the Democratic nomination for Governor of California. He has a better chance of beating the Governator in November, and that may sway the undecideds his way. Just a hunch ....

Canada seems shaken up by the prospect of a homegrown terrorist cell. The pattern is consistent with other terrorist cells: fiery, extremist preachers recruit young men, without the knowledge of the larger, peace loving muslim community.

The Republicans in Congress are again trying to repeal the estate tax. David Kay Johnston's excellent book (see Chapter 6) explains succinctly why the Republican arguments are a farce.