Great Article on the Trade of a LifeTime


This is a long but terrific article on a great trade idea. To summarize, a hedge fund in Chicago was created in 2005 to purchase the lowest tranche equity in mortgage CDO’s. At the same time, they were pushing CDO managers to include the riskiest mortgages into those CDO’s. Also at the same time, the same fund was purchasing CDS against the same CDO’s they were helping to create.

The beauty of the position was that the equity purchased threw off cash flow which was then used to purchase the CDS. A self financing strategy. Brilliant! Almost like a synthetic long/short in options or a backspread where the initial capital outlay is next to nothing so hence leverage is close to infinite (obviously your broker/risk manager would disagree).

Now of course this likely helped perpetuate and deepen the greatest recession since the Great Depression but kudos on the thought process.

So a great question is, what’s the next great trade idea of our generation? Short treasuries? Long Commodities? A short idea is always great because a short position implies volatility, in other words, get paid quick and fast. lol. Anyway, if you have any ideas leave a comment and we can discuss!


~ by largecaptrader on April 15, 2010.

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