The first day of August 2007, I walked into my office and fired up my Bloomberg terminal as normal. I’d been at the hedge fund for a year now, working as part of a small team managing a fund focused exclusively on financial stocks. A few months earlier, the Financial Times had described our office as resembling a university library more than a trading floor, and it was certainly quiet that day – not least because several colleagues were away for the summer. We had just closed the books on an excellent month, “the Fund’s most satisfying since inception”. For the first time, most of our return came from the short side of our portfolio – stocks we were short were down between 10% and 20% amidst deteriorating conditions in the financial sector. 

The following week, though, things would get weird. Stocks we were short began going up, and stocks we were long began going down. We came into the month with a net market exposure of just 15% and a bearish tilt, but stocks ceased behaving as we wo…