We still don’t feel that sorry for hedge funds, although undoubtedly the “champagne quaffers of Mayfair” are feeling a little unloved following the UK’s new short-selling disclosure rules and some very hostile press.
It’s doubtful that your average hedgie in the UK is an avid reader of the Independent, Guardian or Observer – though they might read the Daily Mail, which recently described hedge fund chiefs thus:
…what they do and how they do it affects thousands of ordinary people across Britain, anyone who has shares or even a pension.
They can directly affect share prices, influence whether a fund performs well. indeed, some fear they could trigger a world crash in the stock markets that could make the falls of the past few weeks seem mild.
How do they do this? The most obvious, and some would say pernicious, strategy is ‘short selling’, whereby thanks to a quirk in the trading system financiers sell shares they don’t actually own. They might do this if they believe the price will fall.
But they might like to know that Will Hutton has now taken up the cudgels, with a rant against the hedge fund industry in Sunday’s Observer which makes the Mail seem mild.
After handing plaudits to UK Chancellor Alistair Darling and the FSA for introducing disclosure rules on short-selling and shining their spotlight on “some very murky corners of the financial markets”, (“the Chancellor flushed the speculative princes of the hedge fund world – Harbinger, Tiger Global Management, GLG – into the open”), Hutton pronounces the results of the FSA moves as “revelatory”.
“The hedge funds weren’t even buying back the shares, they were ‘borrowing’ them from pension funds to manipulate the market”, he writes.
Fancy that!!!
What then happens is the opposite of a bubble, a kind of financial black hole. The hedge funds sell the shares simultaneously, and the downward movement becomes self-reinforcing, with companies raising money during a rights issue particularly vulnerable. This is why the government forced disclosure. The hedgies reacted as if they were in Stalin’s Russia; their freedom to kill a company stone dead was being challenged. Let’s not mince words, that is the aim, and it gets ugly and personal. A senior official told me that in one case some hedge funds had allegedly warned the banks underwriting one rights issue to abandon it or face speculative attack – mafia practice.
Then, just to show some sophistication, Hutton says proposals in the US Congress to ban hedge funds and other speculators from oil speculation are “probably over the top”. But, as Will wisely knows, “there is a truth here”:
The price of petrol and the toughness of the credit crunch are being increased by the operation of hedge funds, as is the weakening of your job prospects as companies are forced into ever harsher behaviour. It doesn’t have to be like this; the necessary changes in the markets and corporate ownership are fairly easy to make. They would make it harder for some very rich people to get even richer, but in the US and mainland Europe politicians are ready to contemplate that, partly to defend the legitimacy of capitalism itself. Only in Britain is nothing said, a sign, I think, not of our economic maturity, but political emasculation.