Where are the Hedge Funds?
By Arnold Kling
Is/was the subprime crisis simply a mask for a more general revaluation of the meaning and extent of liquidity? Are such revaluations always so bumpy and so lacking in locally stable iterative processes?
Earlier, he wrote,
we are seeing negative real rates of return in some credit markets. I don’t read this as a reflection of intertemporal preferences and constraints. I read this as a (scary) sign of how segmented some credit markets have become. More concretely, lots of people are running to Treasuries but out of a general sense of fear rather than from rational calculation.
The real interest rate on Treasuries is negative. Yields on many low-risk tax-free bonds are higher than yields on taxable Treasuries. The Agency/Treasury spread (the difference between yields on instruments from Fannie or Freddie and yields on Treasuries) is at levels not seen in decades.
Two years ago, hedge funds were going after microscopic anomalies. Now that the anomalies are so large that they are visible to the naked eye, where are the hedge funds?
Can I start a hedge fund? Surely, if I could short Treasuries and buy other fixed-income instruments, I can pick up a lot alpha, no?