Herd mentality

The unbridled success of the credit derivatives market over the past few years - until last summer, that is - had led large numbers of investors to adopt similar positions in the sector. Such risk concentration was always likely to cause problems if the market imploded - as it proved. So how can fund managers avoid falling foul of 'herding behaviour' in future? Peter Madigan reports

Warnings about herding behaviour in the credit derivatives markets have been dished out on a regular basis over the past couple of years. The signs were pretty clear: credit spreads had been tightening virtually uninterrupted from 2003 to the early part of last year as investors piled into the collateralised debt obligation (CDO) market - the vast majority taking exposure to the mezzanine tranche.

Then came the credit crisis. A sharp rise in delinquencies in the US subprime mortgage market