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Trading Vertical Option Spreads

CTAs: Diamonds during the rough

By Keith H. Black

May 24, 2013 • Reprints

Global investors had a wake-up call in 2008. As asset classes from equities and corporate bonds to commodities and real estate simultaneously suffered record losses, it seemed diversification as a strategy had failed. In short, these diverse asset classes experienced drawdowns as deep as 66% of their value. Some types of hedge funds, such as convertible bond arbitrage or long-short equity, experienced losses of 32%. It seemed that there was nowhere to hide from the global, panic-induced selling that resulted from the market turmoil that culminated in the demise of Lehman Brothers. Even after the markets started to recover, losses were significant, with losses ranging from -15.9% to -19.4% to the S&P 500, the MSCI world equity index, and the S&P GSCI commodity index for the three years ending December 2009 (see “Diamonds in the rough,” below).

Although these “risk on” assets earn high returns over time, they can suffer during times of increased systemic risk. In 2008, a decline in liquidity and credit availability led to forced liquidations and bid-ask spreads as wide as 30% of the value of secondary trading of hedge funds and private equity limited partnerships. 

Gates were erected, meaning that investors who had fulfilled their lock-up period wrongly assumed that they would be able to redeem their interests in hedge fund or real estate holdings. Formerly liquid assets, such as money market funds or stock index funds, faced restricted redemptions given holdings in the massive debt of Lehman Brothers or securities lending programs.  

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Related Terms
energy 3807S&P 1534real estate 562MF Global 379Lehman Brothers 342Bear Stearns 231Managed funds 202Managed Futures 72CTAs 69Hedge Fund Research Inc. 16Commodity trading advisors 8real estate holdings 8Keith H. Black 4

Free Newsletter Modern Trader Follow

Main menu

  • Futures
    • Modern Trader Magazine
    • Commodities
    • Futures Mag Archives
    • ETFs
    • Financials
    • Forex
    • Managed Funds
    • Market Analysis
    • News
    • Options
    • Regulation
    • Technology
    • Trading Strategies
    • Education
    • Futures Op-Ed
  • Favorites
    • Alpha Pages Most Popular
    • Futures Magazine
    • Modern Trader Magazine
    • Most Popular
    • Slideshows & Lists
    • Special Topics
      • Alpha Hunters
      • Bad Boys
      • FINtech
      • High-Frequency Trading
      • Trader's Life
      • Trading Strategies
      • FUTURES MAG's 500th ISSUE
      • We asked traders
  • Traders
    • Market Data
    • Hot Charts
    • Interactive Charts
    • Trading Calendar
  • FINalternatives
  • Hard Assets
    • Home
    • Base Metals
    • Precious Metals
    • Rare Earth Metals
    • Commodities
    • Mining Investments
    • Slideshows
  • Modern Trader
    • Subscribe
    • Past Issues
  • All +
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