Executive summary - Udo Bullmann

strategies, but also among strategies, raising concerns that some triggering event could lead tohighly correlated exits. Furthermore, the ECB has stressed that “… the levels reached in late 2005exceeded those that prevailed just before the near-collapse of the LTCM …” 37 .Table 2: Medians of pair wise correlation coefficients of monthly hedge fund returnswithin strategies(Jan. 1995-Dec. 2005, monthly net of all returns in USD)Sources: ECB Financial Stability Review, June 2006.(Numbers in parentheses after strategy indicate the share of total capital under management(excluding FOHFs) at the end of 2005.)There may be a number of reasons for high correlations. In the case of the LTCM crisis (seebox 1) many of the virtual, statistical models used by hedge funds and other players in financialmarkets led to the same kind of behaviour. In the case of LTCM it also seems as if the brokers,who received order flow information through their dealings with LTCM, took similar positionsalongside their client. In the more recent case of the hedge fund Amaranth (see box 2), the reasonfor its default does not appear to lie especially in excess of leverage but in an unsatisfactorymanagement approach, which underestimated the correlation among different bets and theproblematic concentration on a single thin market like the market for natural gas. Amaranth’sposition represented a significant share of the whole market. Consequently, it was difficult tounwind the fund’s portfolio when things begun to get worse.Despite the increasing correlations, the more recent default of the hedge fund Amaranth did notappear to have threatened or even influenced financial market stability (see box 2). Thus, therehas been an absolute absence of contagion spreads over the other financial markets: No volatilityspikes were registered during September 2006, neither on the stock markets, nor on the bondmarkets. Furthermore, the commodity market itself did not show any sign of fear as the ordinaryprice behaviour of the CRB index in September 2006 testifies. Nonetheless the absence ofcontagion spreads in the Amaranth case is no assurance that hedge funds have become any morerobust. One of several important differences to the LTCM crisis of 1998 was the situation of37 ECB (2006): ibid., p. 135.