The falls in investment bank shares that followed Tuesday’s rumours of hedge fund losses was a sharp reminder of how closely the two group’s fortunes are tied together. Banks finance the hedge funds, provide them with research ideas, execute their trades, provide their administration and supply them with clients through their private banking arms. Oddly enough, they also compete with the sector, both to attract the best traders and in the markets (proprietary trading desks resemble in-house hedge funds).

This link can be a potential source of weakness for the banks, as the mad dash to rescue Long-Term Capital Management in 1998 showed. But the LTCM saga also showed that it was more of an Achilles heel for the hedge funds themselves; banks are aware of hedge fund positions and are able to trade against them when things go wrong.