In the 1987 crash, there was an accelerator mechanism via portfolio insurance. Basically, Rubinstein, Leland and O'Brien got a bunch of investors to buy into portfolio insurance, which would sell securities as prices fell, emulating a put option position. In the crash, this just made things drastically worse.
But it seems hedge funds adopt this sort of strategy. Several prominent hedge funds moved to cash recently: Steven Cohen, Israel Englander, John Paulson. That's a lot of money selling equities, buying yen, etc. No wonder such disparate popular hedge fund trades: long oil, the carry trade (long Aussie dollar, short yen), equities. They were all being unwound.
Your post should read "emulating a short put".
ReplyDeletethe true delta neutral strat. i hear citadel is down 40%? do you still have the defprob email? i sent you one a week some a ago but i take it back. need to research some more on the subj.
ReplyDeleteI didn't understand the going to cash comment either, because it takes away the Volatility Play. Volatility is good for trader's but bad for investors.
ReplyDeleteI read this as our "correlation" models are out of whack, so until we get emotions out of the market, we ain't trading.