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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n