Institutional Investor's Alpha Magazine - May 2008 - (Page 35)

Interview Boaz Weinstein Tipping Point By Imogen Rose-Smith The L ate last June, Deutsche Bank trader Boaz Weinstein was growing increasingly troubled by what he was seeing in the debt and equity markets. Spreads had widened on the loan credit default swap index — a sure sign that investors were looking for insurance against the risk of loan defaults — yet there was no corresponding drop in equity prices. It made no sense to Weinstein, Deutsche’s New York–based co-head of global credit trading. Loans are senior to equity in the capital structure; if a company gets into trouble, lenders are paid back before shareholders receive anything. And Weinstein knew that if investors were worried about credit defaults, equity prices should have been suffering too. Yet although the LCDX index fell 8 percent in about a month, there was no corresponding drop in the Standard & Poor’s 500 stock index. “You should not have the most senior part of the capital structure take a giant drubbing and leave the equity market unchanged,” Weinstein says. The prevailing wisdom at the time was that the credit and equity markets had “decoupled” — that is, they had stopped trading in tandem, as they typically do. But Weinstein wasn’t buying it. He also had a hunch that the emerging pain in the subprime mortgage market would not remain isolated. He happened to be reading The Tipping Point, Malcolm Gladwell’s popular treatise on how little changes suddenly reach a critical mass and the momentum becomes unstoppable. It seemed to Weinstein last June that the markets were at just such an inﬂection point. He was right. Since then global credit and equity markets have been rocked and more than a few hedge funds have suffered serious damage. Write-downs and liquidity shortages at banks have been especially severe (witness the shotgun marriage between Bear Stearns Cos. and rival JPMorgan Chase & Co.). The idea that the credit and equity markets had decoupled seems blissfully naive now. Deutsche Bank Weinstein a nd his was early to recommend team at Deutsche have been in t he t hick of that clients short things, both as counterparties and as risk-takers, subprime mortgages. and they seem to have come through remarkNow Boaz Weinstein, ably unscathed. Deutsche the bank’s co-head was one of the few banks to make the right call on of global credit trading, mortgages; many hedge f unds a re gratef ul to sees opportunities its asset-backed trading to make money on desk for recommending that they short the subthe long side of the prime index. “Boaz is on the short credit market. list of people I call to discuss market opportunities,” says Kenneth Grifﬁn, founder and CEO of $20 billion Chicago-based Citadel Investment Group. “He is both incredibly creative and sensibly pragmatic.” Weinstein, 34, joined Deutsche’s credit derivatives group from crosstown rival Donaldson, Lufkin & Jenrette in January 1998, when such investments were just coming into their own. Among the early users of credit MAY 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 35

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - May 2008

Institutional Investor's Alpha Magazine - May 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Send in the Clones The Good Guys: Outside the Box Cover Story: Welcome to Oz Interview: The Tipping Point Regulation: When Sentinels Go Astray Strategies: Taking Credit Research Center: The Hedge Fund 100 Book Excerpt: Shoot the Messenger Alpha Bytes: VaR Enough? Unhedged: Commentary: Not Your Father's Activist

Institutional Investor's Alpha Magazine - May 2008

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