Cleaning Up on the Meltdown

By anticipating problems in the credit markets, a Yale-trained computer scientist and other asset managers are producing healthy returns

Back in the fall of 2006, hedge fund manager Nandu Narayanan was thunderstruck by a relatively obscure economic metric, the ratio of credit to a country's gross domestic product. Back during the Asian economic crisis of the late 1990s, Malaysia's ratio was an astonishing 220%, or $2.20 in debt for every dollar of economic output. Yet as 2006 drew to a close, the ratio in the U.S. climbed to an eye-popping 370% to 440%, depending upon how it was measured. "To say that it was well north of anything ever seen in most countries of the world is a fact," Narayanan says. "Any rate rise in the U.S. was likely to cause big problems in the credit space." Thus, he deployed his assets to capitalize on this early warning sign of the looming meltdown in the U.S. credit market.

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