Just How Contagious Is That Hedge Fund?

By MARK HULBERT

While I wouldn't describe the following article as market moving-it does provide insight as to why markets move as they do-NFX

HEDGE funds may well stay vulnerable to the kind of rapidly spreading losses that have been precipitated this summer by problems in the subprime mortgage market.

The fundamental problem is that even when hedge funds say they are pursuing entirely separate investment strategies, they often actually use common approaches, according to several experts. When one of these bets goes bad for one hedge fund, losses can result for many of them, disrupting the broader financial markets.

The convergence of hedge fund strategies is quantifiable. It was detected in a study completed earlier this year by Nicole M. Boyson, an assistant professor of finance and insurance at Northeastern University; Christof W. Stahel, an assistant professor of finance at George Mason University; and René M. Stulz, a professor of finance at Ohio State University. A copy of their study, “Is There Hedge Fund Contagion?,” is at http://http://ssrn.com/abstract=884202.