Lost in the crowd

The simultaneous unwinding of quantitative hedge fund portfolios last August, along with the liquidity crunch in the credit market, has highlighted the danger of crowded trades. How do investors attempt to identify herding behaviour? By Peter Madigan


Warnings about herding behaviour in the credit derivatives markets have been dished out on a regular basis over the past couple of years. The signs were pretty clear: credit spreads had been tightening virtually uninterrupted from 2003 to the early part of last year as investors piled into the collateralised debt obligation (CDO) market - the vast majority taking exposure to the mezzanine tranche. Then came the credit crisis. A sharp rise in delinquencies in the US subprime mortgage market

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