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Hedge Funds Take More Than A Trim

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James Quinn explains how turbulent markets left computer-driven technology, used by managers to operate investment strategy, struggling to cope

<LI>The casualties

cnhedge116.jpgHere comes the chainsaw: hedge funds are having to endure far more than pruning

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.


Edited by crash2006

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Trading is driven by computers programmed by mathematical maestros.

It's a wonder they bother with airline pilots and ships captains nowadays with computers being so good. Non of the maestros did their PhD in catastrophe theory I take it? Oops.

Edited by gordonbrown

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