The correlation crisis of May has a well-known backdrop. As spreads tightened in the two-and-a-half years prior to the Ford/General Motors (GM) blowout, investors turned their attention to assets such as structured credit that yielded more than bonds. Buyers, largely real-money investors such as insurers, wanted mezzanine tranches - leaving dealers with hefty short positions.
Over the same period, hedge funds also bought structured credit. They were hooked because it enabled them to sep