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of changing. It is a challenging, whipsaw environment. He feels a humble approach needs to be taken. Limiting leverage is the most important risk management tool at the moment. Elliott Associates uses a very low amount of leverage except in fixed-income arbitrage positions. Leverage, ranging from 1.3:1 to 1.5:1 in all businesses, is low relative to his peers. In fixed-income arbitrage, leverage is 20:1, which is in line with his peers, says Singer. This strategy has not changed over the years.

Singer has long emphasized risk management and recently spoke about this topic at a conference in New York. In recalling the crash of October 1987, he questioned whether it really was a 10 sigma event—like an asteroid hitting earth. Was it a once-in-a-lifetime event or a sign of things to come? Since 1987, he observed, we have experienced crashes also in 1994 and 1998.1

Singer sees three major risks—model risk, herding risk, and equity market risk. "Those who trust the models do so at their own peril. They will be hurt, as the models are wrong. The world may be different than those used in the models' history." Further exacerbating the change are developments in technology, easy access to leverage, instant communication, and herding—the piling on of momentum trades.

To lessen the impact of herding, Singer suggests finding out who else owns the spreads that you own and determining their motivation. If there are too many players, the position can be a trap. They can also impact the exits as well. People getting into trouble can also have a herding effect. Two examples of these were the Quest–US West merger as well as General Motors–Hughes Electronics. In both cases, the amount of arbitrage activity was significant and turned out to have painful implications for Wall Street. Another example was Bell Canada, which owned and spun off a big stake in Nortel. The arbitrageurs expected higher valuations than actually resulted when the stub started trading. "Now the arbitrageurs are sitting and choking on this. It will take a long time."

One of Singer's goals is to attempt to do as much as possible that is uncorrelated to the stock market (i.e., stay away from stock market exposure), because it is becoming so difficult to hedge.

He observes that the term "stock market" is increasingly not a single concept. More variation is occurring in the sectors of the market.

If the stock market should turn downward, Singer is well protected.