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Fund Managers Miss Correlation Uptick

Dealers say hedge funds and prop desks may have missed out on the jump in equity implied correlation following the bomb attacks in London, after unwinding dispersion trades designed to take long correlation positions.

Dealers say hedge funds and prop desks may have missed out on the jump in equity implied correlation following the bomb attacks in London, after unwinding dispersion trades designed to take long correlation positions. Some hedge funds and prop desks unwound dispersion plays, which typically trade single stock variance swaps against index variance swaps, when similar correlation trades in the credit market came to grief in May (DW, 5/23).

Equity sales officials said it had become harder to pitch the trades with levels of implied volatility and implied correlation at historical lows. "We thought the juice had gone from these trades," agreed one equity fund manager. But last Thursday implied correlation spiked as stock fell across all sectors in reaction to the bombs. "It could have been a profit-taking opportunity," lamented one fund manager.

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