Institutional Investor's Alpha Magazine - March 2008 - (Page 3) Letter from the editor Bear Necessity Michael Carroll EXECUTIVE EDITOR Michael Peltz EDITOR Michael Carroll INTERNATIONAL EDITOR Tom Buerkle MANAGING EDITOR David Schutt U.S. EDITOR Jeffrey Kutler ART DIRECTOR Nathan Sinclair EDITOR-AT-LARGE Firth Calhoun ASSISTANT MANAGING EDITORS Peter Carbonara ART DIRECTOR Irene Tom Johnson (Research), (Money Management), Ledwith William Loob (Editorial Production), Sathya ASSISTANT MANAGING EDITORS Lewis Knox Rajavelu (Director, Research Operations Group), Tracy (Research), Jeffrey Kutler (Global Technology and Tjaden (International) Banking), Deborah F. McClellan (Editorial BUREAU CHIEF Allen Cheng (Asia) Production), Barbara Rudolph (Money ManageSENIOR EDITORS Loch Adamson (London), EDITOR ment) Steven Brull (Los Angeles), Karl Cates, Jane B. EDITOR Tom Buerkle (London) EUROPEAN Kenney (Editorial Research), Jo Wrighton (Paris) BUREAU CHIEF Kevin Hamlin (Hong Kong) SENIOR WRITERS Frances Denmark, Michael SENIOR EDITORS Steven Brull (Los Angeles), Andrew Capon (London), Jane B. Kenney STAFF WRITERS Dan Freed, David Lanchner (Paris), (Editorial Rose-Smith, Julie Segal Imogen Research) ASSOCIATE EDITOR Tucker Justin SENIOR WRITERS Deepak Gopinath,Ewing Shari, Henry Teitelbaum Sivert Hagen, John Livingstone, WeiQing Lu (Research STAFF WRITERS Rich Blake, David Lanchner Specialist), Timothy Roberts (Research Specialist), (Paris) Carolynn B. Tetro SENIOR ASSOCIATEWray COPY CHIEF David EDITOR Tucker Ewing SENIOR CONTRIBUTING EDITORS Fran Hawthorne, ASSOCIATE EDITORS Emily Fleckner, Sivert Harvey D. Shapiro, Stephen Taub Hagen CONTRIBUTING WRITERS Pam Abramowitz, COPY CHIEF David Wray Danielle Beurteaux, Phil Davis, Udayan Gupta, Scott Martin, Neil O’Hara, SENIOR CONTRIBUTING EDITORS Fran Hawthorne, Nick Rockel, JayeD. Shapiro, Charles Smith Hal Lux, Harvey Scholl, IrwinSpeizer COPY DEPARTMENTTaub, Joan Warner (Tokyo), Stephen Deputy Copy Chief: Bill Christophersen; CONTRIBUTING EDITORS Colin Barraclough, Copy Editors: Ingrid Accardi, Ruth Hamel Lucy Conger (Mexico City), Jonathan Kandell, ASSISTANT TO THE EDITOR Elizabeth Simroe Lois Madison Reamy, Kazuhiko Shimizu ART DEPARTMENT Deputy Art Director: Diana Panfil; (Beijing), Leah Nathans Spiro Associate Art Director: Anthony Scerri; Senior Designer: Lee H.Wilson; COPY DEPARTMENT Deputy Copy Chief: Jeff CranAssociate: Sabrina Henley; Photo Editor: Daniella Nilva; mer Associate Photo Editor: Alden Gewirtz; Color Imaging THE EDITOR Elizabeth Simroe ASSISTANT TO Manager: John Miliczenko CHAIRMAN & CEO Gary Mueller ART DEPARTMENT Deputy Art Director: Patrizia Bove; GROUP PUBLISHER Christine Cavolina Associate Art Director: Stephanie Lora; Photo Editor: PUBLISHER Joy DeSanto Anastasia Pleasant; Color Imaging Manager: PUBLISHER, INTERNATIONAL Spencer Wicks PUBLISHER, ASIA Wendy Gallagher John Miliczenko ONLINE SALES DIRECTOR Chris DeAngelis EXECUTIVE DIRECTOR OF MARKETING PRESIDENT & CEO Christopher R. Brown Louis Cassetta PUBLISHER Christine Cavolina Gill PRODUCTION DIRECTOR Brian DIRECTOR OF FULFILLMENT Robert Tonchuk PUBLISHER, INTERNATIONAL Lisa Traeger CHIEF OPERATING OFFICER David E. Antin PRODUCTION DIRECTOR Alpha,TMGill Institutional Investor’s AlphaTM and Brian 225 Park Avenue South, ASSOCIATE EDITORS Schack New York, NY 10003; (212) 224-3300; Fax: (212) 224-3171. MANAGING DIRECTOR OF RESEARCH PRODUCTS © 2008 Institutional Investor, Inc. No statement in this magazine is Denise Murrell to be construed as a recommendation to buy or sell securities. Neither this publicationOF FINANCE it may be reproduced or transmitted DIRECTOR nor any part of AND OPERATIONS in any form or by any means, electronic or mechanical, including David E. Antin photocopying, recording or by any information storage and retrieval system, without the prior written permission of Institutional Investor magazine. For Investor’scontact TM and Palmieri (212) 224-3675; Institutional reprints, Alpha Dewey Alpha,TM 225 Park AvFax: (212) 224-3563; e-mail: dpalmieri@iinvestor.com.(212) enue South, New York, NY 10003; (212) 224-3300; Fax: Subscription hotline (800) 437-9997; Overseas (44-20) 7779 8999 224-3171. SO MUCH FOR THE LUCK OF THE IRISH. On March 17, St. Patrick’s Day, markets around the world tumbled on the news that JPMorgan Chase was taking over Bear Stearns Cos., paying a bargain-basement price of $2.00 a share for the beleaguered investment bank that was on the brink of filing for bankruptcy. Investors worried that the deal — brokered by the Federal Reserve, which took the unusual step of agreeing to finance as much as $30 billion of Bear’s less-liquid assets, including mortgage securities — could be the first of several such bailouts needed as the credit crisis spreads. The rapid demise of Bear Stearns is remarkable in many ways, not least of which were the actions taken by the Fed. When the agency announced on March 14 that it would lend as much as $200 billion in Treasury bonds to investment banks in return for an equivalent amount of mortgage securities — buying Bear a couple of days to avoid bankruptcy — it marked the first time the Fed has opened its discount window to non-deposit-taking institutions. One of the intriguing aspects of the deal is the role that hedge funds played in the fall of Bear, which a decade ago famously refused to participate in the Fed-orchestrated bailout of hedge fund LongTerm Capital Management. Bear Stearns had long been the thirdbiggest provider of prime brokerage services — trailing only Morgan Stanley and Goldman, Sachs & Co. — but starting last summer its hedge fund clients began shifting their balances and accounts to other brokers. The movement accelerated in February and early March as concerns over Bear’s solvency grew, adding to the pressure for the 85-year-old investment bank to strike a deal with JPMorgan, whose CEO, Jamie Dimon, looks to be the big winner here. One client that stuck by Bear Stearns is New York–based Thales Fund Management. Thales uses several prime brokers to implement its computer-powered strategies, which involve making thousands of trades in thousands of stocks and other securities to try to profit from tiny mispricings. Like many hedge fund firms pursuing quantitative strategies, Thales stumbled badly last August when its models simply stopped working, caught in three days of panic selling among equity investors set off by troubles in the subprime mortgage market. But as Contributing Writer Nick Rockel explains in this month’s cover story, “The New Math” (page 22), Thales and other quant shops aren’t sitting around waiting for the next calamity. They are extending the boundaries of computational finance into new realms — applying concepts from molecular physics, artificial intelligence and other scientific disciplines to their computer models in hopes of finding a way to prosper during the ongoing credit crisis. MICHAEL PELTZ EXECUTIVE EDITOR mpeltz@iimagazine.com MARCH 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 3 FEBRUARY2008 • INSTITUTIONAL INVESTOR’S ALPHA • 00
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