Hedge funds: Rough around the hedges

Intuitively unrelated markets often move together, especially in a crisis. But clever strategies designed to work even as markets move around them can also prove surprisingly related. Take some popular hedge fund trades gone awry. One was buying shares of likely takeover targets. Some funds also shorted credit exposure in the credit default swap market because a buyout, while good for a company’s stock, is generally bad for its credit. Variants of these strategies targeted relative price move...