Also, a great discussion on Berkshire abnormally positive basis. Hat tip purearb
What's critical here is that the two risk factors most responsible for driving cash -synthetic basis-namely, the availability of financing and the positioning (long or short cash relative to synthetic) of levered players - inconveniently also two of the least desirable risk factors for a levered instrument vehicle like most hedge funds. Those factors' combined impact literally describes the terms of a classic common-investor liquidation crisis. By incurring heavy exposure to financing risk and the portfolio of other levered investors, a levered hedge fund is effectively selling a gigantic put option on its ability to finance its own positions. Moreover, this put option has characteristics that greatly increased the probability that the option will move in the money at the worst possible moment. If a levered investors suddenly finds itself facing heavy losses, it's not a stretch to suppose that, at the same time and for largely the same reasons, that investor's equity capital base is under pressure from redemptions, its financing position is weakening because of a credit crunch, and other similarly positioned investors are liquidating. Worse still, all of these phenomena lend to self-reinforce in pernicious ways. In such circumstances, it's imprudent to count on financing and trading counterparties to provide help because, as already noted, they're likely to be deleveraging at the same time.
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