Correlation blip hits hedge funds

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Hedge funds and proprietary trading desks were left nursing multi-million dollar mark-to-market losses in May as a shift in correlation following the autos downgrades hit a popular hedging strategy.

Attracted by the high returns on equity because the market was so highly levered, many were long equity and short the mezzanine tranche of indices. Dependent on systemic risk, the success of this delta-hedging trade was turned upside down by an unexpected reaction to the downgrades of Ford and GM

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