market folly

Today we present you with research from The D.E. Shaw Group. In their latest Market Insights for March 2010, they focus on leverage. In their report entitled, "Lessons from the Woodshop: Common Sense in Managing and Measuring Leverage," they discuss the quality of leverage versus the quantity of leverage. In their research, they dive into a few questions, including:

- Why is the leverage being used?
- Under what terms and conditions is the borrowing being done?
- How is the leverage quantity being computed?

They examine how often times investors don't examine the above questions and in their commentary dive into one of the hottest topics from the financial crisis.

D.E. Shaw & Co was founded by David E. Shaw in 1988 and focuses on intertwining technology with finance. It is a hedge fund, private equity firm, and technology development shop all rolled into one. In particular, they focus on quantitative strategies and statistical arbitrage. Notable former D.E. Shaw employees include Jeff Bezos (who founded Amazon.com) and Lawrence Summers, who left the firm to serve on President Obama’s economic team. Our prior coverage of the firm includes theoretical research on common trading mistakes and a look at the basis monster that ate Wall Street.

Embedded below is D.E. Shaw's latest Market Insight for March 2010:



In the end, they come up with some simple takeaways/suggestions to help manage liabilities:

- Due diligence is key
- Diversify both assets & liabilities
- Focus on long-term financing sources
- Develop strong relationships with financing counterparties

Overall, an interesting and detailed look at an omnipresent topic on Wall Street. As always, you can follow further excellent investment insight through our coverage of hedge fund commentaries.