Why You'll Feel Hedge Funds' Pain

It is a perverse fact of life in the market for financial instruments that the well-intentioned quest for safety very often leads to the worst sort of dangers.

Almost 20 years ago, the great crash of 1987 came about in large part as a result of stock market participants' purchase of a kind of portfolio insurance that paradoxically caused the very type of volatility it was intended to prevent.

About seven years ago, the Long Term Capital Management hedge-fund crisis sprang from a wrongheaded theory by prize-winning economists that tons of money could be made with little risk by betting that the sovereign debt of various European countries would converge. ...