Summary
The notional value of over-the-counter (OTC) equity derivatives, including options, forwards and swaps, peaked at $9.2 trillion in June 2007, a 36% increase over the $6.8 trillion racked up a year earlier. It seemed like the best of all possible worlds for quant funds and their Midas-touch managers -- until the subprime meltdown turned their world on its head. The first sign that the party for quant funds might soon be over came in March 2007, when subprime mortgages started going bad. Hedge funds survived the first shot of turbulence and came back strong -- until August 2007, when the subprime speculative bubble burst, throwing equity markets around the world into turmoil. Through 2008, higher market volatility, continuation of the credit crisis and increased likelihood of recession in the US will be the dominant themes. But it is not all bad news for equity derivatives, which are expected to have a strong year.
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Extract
Down but Not Out
They were the young guns of Wall Street: derivatives traders, many still in their 20s, who made fortunes in the newest and perhaps most cryptic corner of the derivatives universe. They turned market volatility into an asset class and traded it. They also created statistical arbitrage funds based on complex algorithms that triggere...
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