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The FED would love for hedge funds to INCREASE their cash bond and derivative Arb activity. This would arb away the differential and hedge funds would make a t

The FED would love for hedge funds to INCREASE their cash bond and derivative Arb activity. This would arb away the differential and hedge funds would make a tidy profit in performing this service for the market. The problem is that hedge funds, prop desks, banks, and pretty much everyone DIDN'T step in and arb away the differential. This led to a massive 10%! rate for O/N repo, which is supposed to be a risk free instrument.

hogFeast 7y ago
Yes buddy, the reason LTCM went bust was they didn't have enough money. Don't get me wrong, I am glad people like you exist (literally, this is the reason it is so easy to print in markets). But that isn't how arbs work. If you are levered 100x, the solution isn't to go 150x. We need someone to tap people on the shoulder and say: "Stop digging buddy, wrap it up, your done". This is capitalism. Instead, we have this engineer mindset where the market moving against you is a sign that everyone else is an idiot and you just need to borrow more money. In terms of your answer, the reason HFs didn't step in is because they are the ones BORROWING from the market. How do you not understand this? Seems like you didn't read the post. The big 4 provide liquidity to HFs, that is the function of the market so HFs can't suddenly turn into liquidity providers themselves. If you are levered 10x+ and running a $10bn+ overnight position, you can't just magic up another $10bn from nowhere...that is the point, you have tapped the market, nothing is left. I remember having this convo in 2007 where people legitimately got angry when you questioned whether more leverage was the answer (it isn't, it doesn't go anywhere)...it is amazing we are here again (and again, this is the engineer mindset...never mark your book, never stop borrowing, keep picking up quarters until someone taps you on the shoulder and says you don't work here anymore). And as then, people with a deep understanding of the structure of these markets are basically non-existent.
- yasp 7y ago
  Question for you, since you seem pretty knowledgeable. How does a HF lever up 10x+ using the repo market anyhow? Is this a typical leverage ratio for borrowing in the repo market? I'm guessing it's extremely rare for a UST to lose >10% of it's value overnight, which I guess would mean that this would be how they're doing it. What is the customary leverage ratio for repo borrowing and is there some repo-market specific name for this metric?

hogFeast 7y ago

Yes buddy, the reason LTCM went bust was they didn't have enough money. Don't get me wrong, I am glad people like you exist (literally, this is the reason it is so easy to print in markets). But that isn't how arbs work. If you are levered 100x, the solution isn't to go 150x. We need someone to tap people on the shoulder and say: "Stop digging buddy, wrap it up, your done". This is capitalism. Instead, we have this engineer mindset where the market moving against you is a sign that everyone else is an idiot and you just need to borrow more money. In terms of your answer, the reason HFs didn't step in is because they are the ones BORROWING from the market. How do you not understand this? Seems like you didn't read the post. The big 4 provide liquidity to HFs, that is the function of the market so HFs can't suddenly turn into liquidity providers themselves. If you are levered 10x+ and running a $10bn+ overnight position, you can't just magic up another $10bn from nowhere...that is the point, you have tapped the market, nothing is left. I remember having this convo in 2007 where people legitimately got angry when you questioned whether more leverage was the answer (it isn't, it doesn't go anywhere)...it is amazing we are here again (and again, this is the engineer mindset...never mark your book, never stop borrowing, keep picking up quarters until someone taps you on the shoulder and says you don't work here anymore). And as then, people with a deep understanding of the structure of these markets are basically non-existent.

yasp 7y ago
Question for you, since you seem pretty knowledgeable. How does a HF lever up 10x+ using the repo market anyhow? Is this a typical leverage ratio for borrowing in the repo market? I'm guessing it's extremely rare for a UST to lose >10% of it's value overnight, which I guess would mean that this would be how they're doing it. What is the customary leverage ratio for repo borrowing and is there some repo-market specific name for this metric?