The untenable robustness of hedging

The current bout of volatility in the corporate credit derivatives index market has prompted wild swings in the effectiveness of established hedging strategies. Now dealers and investors are scrambling to adapt to the new market conditions. By Navroz Patel

Extreme spread-widening and volatility have become par for the course in credit markets in recent weeks. Woes that began in US subprime mortgages in late February have spread across the asset-backed securities (ABSs) market, leveraged loans and even into the single-name and index corporate credit derivatives markets.

The ABX.HE, a family of synthetic indexes referencing home equity ABSs, has been in freefall in recent months. The ABX.HE.06-2 BBB- index (which comprises credit default swaps (CDSs)