Crisis of correlation

Market dynamics have prompted multi-million-dollar mark-to-market losses on structured credit trades. Idiosyncratic risk has exposed the frailty of hedging in an imbalanced correlation market. By Navroz Patel


The downgrade of Ford and General Motors (GM) to junk status by Standard & Poor's last month was widely anticipated in the credit markets. What was not understood – by most at least – was that the ratings action would prompt an unprecedented period of stress in the single-tranche credit market. Risk managers at some dealers, hedge funds and other investors were left reeling, with commonplace hedging and investment strategies suffering multi-million-dollar mark-to-market losses.

"To be frank

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