Mutual Fund Eyed In Market Swoon As Universa’s Taleb Responds

May 17 2010 | 12:13pm ET

While much suspicion has swirled around hedge funds—and even a prime brokerage—as the cause of the precipitous drop in the stock market 11 days ago, the main culprit may have been a traditional old mutual fund house.

Waddell & Reed Financial is the unidentified firm cited by Commodity Futures Trading Commission Chairman Gary Gensler as the seller of a huge number of Standard & Poor’s 500 Index e-mini contracts, Reuters reports. Gensler said last week that “one large” seller’s “bona fide hedging transaction,” was responsible for about 9% of the volume traded during the sell-off and into the recovery between 2:40 p.m. and 3 p.m. on May 6.

Overland Park, Kansas-based Waddell started selling about 10 minutes before the Dow Jones Industrial Average began its nearly 1,000 point swoon, finishing up at about 2:51 p.m., during the Dow’s equally rapid recovery, Gensler said.

Earlier suspicion had centered on hedge fund Universa Investment’s $7.5 million options trade and on prime brokerage Terra Nova Financial. Terra Nova denied that it had anything to do with the market plunge; a Universa adviser argued that searching for the immediate cause of the brief crash was missing the point entirely.

“When a bridge collapses, you don’t look at the last truck that was on it, you look at the engineer,” Nassim Nicholas Taleb, the well-known “Black Swan” economist and adviser to Santa Monica, Calif.-based Universa, told Bloomberg Television. “You’re looking for the straw that broke the camel’s back. Let’s not worry about the straw; focus on the back.”

Taleb said he was not sure what role, if any, Universa’s trade played in the short-lived crisis.

“I have absolutely no idea what Universa did, and I’m not connected, so I cannot provide an answer as the Nassim that is connected to Universa,” he said.


In Depth

Change In 'Accredited Investor' Definition Could Hurt Crowdfunding Space

Jul 25 2014 | 8:14am ET

The Securities and Exchange Commission is considering changes to its 30-year-old...

Lifestyle

David Yarrow On Growing His Hedge Fund And Shooting The Animals And People Of Africa - As A Photographer

Jul 23 2014 | 6:44am ET

While he’s always been a photographer, recent expeditions to Iceland, Ethiopia...

Guest Contributor

The Truth About Track Record Portability

Jul 24 2014 | 5:55am ET

The number of private funds converting to mutual funds has increased significantly...

 

Sponsored Content

    Northern Trust Helps Hedge Funds Navigate Derivatives Regulations

    Jul 8 2014 | 10:48am ET

    The surge in derivatives regulation is among the most complex challenges facing the financial services industry today. Northern Trust’s Joshua Satten recently spoke with FINalternatives to share insights into the challenges presented by new regulation and explore how the industry is responding. Read more…

Publisher's Note