Hans Hufschmid, former partner at Long-Term Capital Management, is stressing how this time around it is much worse than it was in 1998 when LTCM went under (see Bloomberg article). The main reason? This time it affects everyone. Given that hedge funds benefit and even survive on credit and leverage, current liquidity issues are forcing many to take less exotic and esoteric positions, essentially reducing flexibility and opportunity. Of course, it is easy to forget that it was not exactly a picnic for everyone after the LTCM collapse, but intervention by the Fed did soften the impact. As mentioned in a previous post, July has been a bad month for hedge funds, with data from Hedge Fund Research showing that on average funds fell 2.4 percent in July and are down 3.5 percent year-to-date. Furthermore, daily net asset value estimates are down 2.8 percent in the month. As a result, fewer funds are starting up, and some smaller funds are closing down, crowded out by larger players with better liquidity and capital, although emerging hedge funds may be outperforming (see previous posts here and here).

David Ko, a quantum physicist who was formally with Long-Term Capital Management, has a new hedge fund out of London focused on profiting from volatile markets (see WSJ article). The fund, called Kurtosis Capital Partners is in partnership with Stephen Cain, a former global head of currency trading at Deutsche Asset Management. The global macro fund hopes to initially raise between $100 to $250 million. As quoted by Cain, "Our strategy is to buy options when we think a market is going to become volatile. The closer to the dislocation, the better. Then, at the moment of highest volatility, sell." Buy low and sell high. Sounds like a good strategy to me. Certainly not complicated on the surface, but it would be interesting to see what types of models they are coming up with to forecast volatility, especially if Ko plans to use his background in quantum physics. Something tells me it is a little more complicated than GARCH. Cain also mentions that the fund will not use leverage, but will limit risk to the option purchase price. Another good lesson, and one learned the hard way at LTCM.