It is two months since massive volatility in credit tranches hit hedge funds and dealers, causing significant and unexpected losses. These investors' view on the credit markets had encouraged them to create long correlation trades. This involved taking a long position in equity tranches of the CDX and iTraxx indices while hedging delta with the index or the mezzanine tranches of the same indices.
The rise in idiosyncratic risk and resultant fall in correlation caused by GMAC's downgrade...
