From the Independent (HT Fintag):
A City trader who formerly worked at Long-Term Capital Management, the hedge fund that spectacularly blew up a decade ago forcing the Federal Reserve to step in with a rescue package, has teamed up with a former colleague to launch a new fund in London.
David Ko, whose background is in quantum physics, filed documentation earlier this year with Companies House applying to set up a hedge fund called Kurtosis Capital Partners. The other founder named in the document was Stephen Cain, a former senior trader at Deutsche Asset Management.
Kurtosis being in the simplest terms, the departure of a curve or trend away from normality. From the Greek word for curve - or bulge - Kurtos (kυρτός).
Kurtosis risk, then, in trading terms, being the occurance of “extreme” datapoints outside a normal - gaussian - distrubution curve. What you might in the financial vulgate call fat tails.
The interesting point then, being that Ko’s alma mater, LTCM, ignored kurtosis risk to its extreme detriment. The unlikely occurance of a Russian default and the subsequent generalised flight to quality in fixed income markets wrought havoc on LTCM’s highly leveraged convergence trades.
Adequately capturing kurtosis risk has ever since been something of a holy grail in structured finance.
So Mr Ko, what’s in a name?
Related links
A focus on the exceptions that prove the rule - FT
