Daily Telegraph- Masters of the Universe. The new investment bankers. Hedgies. Whatever name you choose to describe hedge fund managers, it is always a positive one. That was until last Thursday,when trading screens turned red across the globe and the latest whiz-kids on the block proved to be just as infallible as rest of the financial community.
The root of the problems lie in the US sub-prime mortgage market last year. As these high-risk home loans were diced and spliced into packages of collaterised debt obligation (CDO) and syndicated into various forms, few hedge fund managers saw the potential downside.
The first hint came earlier this year when Dillon Read Capital Management, UBS’s hedge fund, was closed after running up losses stemming from the collapse of the sub-prime mortgage market. A few weeks ago the contagion spread to two high-profile Bear Stearns hedge funds.
Ironically, it is not in such credit strategy funds where the majority of the damage has been done. The real pain has been seen in hedge funds which technically offered investors a much safer ride. Quantitative funds – or “quants” – use algorithmic formulas to assess historical data and decide upon an investment strategy. Trading is driven by computers programmed by mathematical maestros.
