“The worst day ever,” one reader tells DealBreaker. Another describes it as “a bloodbath.”
In particular, statistical arbitrage hedge funds—StatArb, as they say—are said to have taken a beating in the last couple of days. For all you investment bankers in M&A, a typical statistical arbitrage strategy is to look for stocks whose prices usually move together but have recently diverged. They then place take positions intended to make money when the usual relationship is re-established. Sometimes this means shorting stocks that have unexpectedly risen or buying stocks with downside divergence. The idea is to make money from temporary mispricing in the market.
A number of DealBreaker readers have written in to say that the StatArbs are in trouble.
“The trading volumes are going thru roof, to the point that the program trading desks servers are crashing,” one reader writes. “For what it's worth, I think it's part of the unwinding of leverage from June and July. A number of multi-strategy shops are looking at losses and can't even get a bid on certain swaps, fixed income and derivatives. So, what's a risk manager/CIO going to do? Sell the most liquid part of their book.”
None of the computers or gerbils running the StatArb books would comment to DealBreaker.
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