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Does Europe need hedge funds?

Robert Peston | 09:54 UK time, Thursday, 9 July 2009

Boris Johnson has just been on the Today Programme on the latest phase of his "Save Europe's Hedge Funds" campaign.
 
Boris JohnsonHe fears that proposed new EU legislation will drive hedge funds - and perhaps private equity - to relocate to the US and Switzerland.
 
And he's probably right. Hedge fund managers tell me they hate the combination of the additional bureaucracy and the probable restrictions on how much they can borrow that's contained in the legislative draft.
 
So does the Europe Union need hedge funds? And, since most of them are here in the UK, does London need hedge funds and private equity?
 
Many of you, I know, think this is a fatuous question. You hate the lot of them.
 
But the arguments are more nuanced than you might think.
 
The case for the defence goes like this.
 
1) They help the distribution of capital to those who can use it most productively. This is importantly true of private-equity and venture capital firms that back start-ups and growing companies. It's also true of the smarter hedge funds. It's almost certainly not true of private-equity funds that borrow to buy big mature businesses (see below).
 
2) They contribute to the liquidity of markets.
 
3) Over many years, their investment performance has tended to be rather better than that of conventional fund managers. So they provide a useful investment alternative for the pension funds on which millions of us rely. However the performance of better and worse funds varies enormously and they do not represent a homogeneous asset class. So this argument should not be over-stated.
 
4) They've created a bit of high-value employment in the UK, quite a lot of it at banks, accountants and legal firms that provide services to them. And not all of their employees strive night and day to avoid paying UK taxes.
 
5) Hedge funds were "incentivised regulators", in the ironic phrase coined by one hedge-fund manager. What I mean by that is that hedge funds such as Paulson, Soros, Landsdowne, Kynikos and so on spotted the excessive risks being accumulated in the global financial economy and in individual banks long before alarm bells were ringing at the regulatory authorities and central banks. If the authorities had been awake and spotted the bets these firms were making on financial meltdown, more effective pre-emptive action might have been taken rather earlier.
 
6) They were much less responsible for the global financial crisis than the big banks and investment banks.
 
There is also a case for driving them into the sea. It goes like this.
 
a) They created a market for all sorts of toxic financial products that the world could have done without. The growth of the market in collateralised debt obligations, credit default swaps and so on would have been significantly less without the liquidity provided by hedge funds.
 
b) Vast numbers of them were primarily a play on the availability of cheap debt at a time of rising asset prices. Their investment prowess has been overstated.
 
c) Hedge funds increased the vulnerability of the financial system because of the way they provided vital short term finance (liquidity) to investment banks, which they were forced to withdraw at moments of acute stress for the likes of Bear Stearns and Lehman -because they in turn were an ATM for investors who were able to demand their cash back at a moment's notice.
 
d) Private equity firms who've bought bigger mature businesses were simply placing a bet - which they've lost - on the economy continuing to grow and debt remaining cheap for them. They were not, as they claimed, superior managers of businesses. This year they will suffer record losses. Which in turn will generate substantial losses for the already weakened banks that have lent to them (a big hello to HBOS, RBS and Barclays, inter alia). There could be defaults on more than £40bn of European private-equity loans this year.
 
e) Their uber-generous remuneration model was unwisely imitated by banks and investment banks, which contributed to bankers taking crazy risks to generate massive bonuses.
 
f) Some short-selling hedge funds may have contributed to the instability of systemically important banks, by fomenting anxieties about those banks which prompted the withdrawal of vital financial support to them (by the way, no regulator has ever proved malicious behaviour by hedge funds in this respect).
 
The rational evaluation is that hedge funds and private equity don't provide a particularly socially useful function, but then we tolerate all sorts of institutions and practices that don't conspicuously contribute to public welfare. For me it's important that they've on the whole done a better job of identifying irrational exuberance in markets than regulators, central bankers and politicians that are funded by us, by taxpayers.
 
It worries me slightly that there's a mood to banish a breed who've shown an ability to shout out that the emperor is striding around buck naked.
 
Loving them may not be easy, unless you've made a mint by backing the shrewder funds over the years. But exiling them from these shores may be an over-reaction - and, in that sense, the proposed European legislation may be misplaced. 
 

Comments

Page 1 of 2

  • Comment number 1.

    Listen well to Boris. He is one very very clever astute man.

    He may well have the keys to No. 10 one day.

  • Comment number 2.

    Do we need hedge funds? No. Who likes hedge funds? All those with money to burn and to speculate. Do hedge funds care for the wider society? No.
    Should we care for them. No.
    Hedge funds often use tax havens to hide their money trails and are key actors in the global shadow banking system. The sooner they are shut down, the better.
    You can find a much more detailed background analysis here:
    http://globalinsights.wordpress.com/

  • Comment number 3.

    What is "uber generous" supposed to imply that "over generous" does not?

  • Comment number 4.

    The simple answer is NO. Their function is about as beneficial as that of the cockroach. It is well-accepted that they played a material role in the near destruction of the global financial and profited handsomely from shoting and runour mongering. They were provided the liquidity to do so by the very same investment banks that colluded with the rating agencies to create the toxic waste other banks bought into. In some cases the very same investment banks own hedge funds were busy shorting the very same stuff as it was peddled to others. If they have nothing to hide than why would they be worried about coming into the light so that we can all see how law abiding they really are and how pucker their investors are. So far the nations anger has been focussed on the hapless RBS and Lloyds who may have made some errors of judgement. Why do we continue to ignore those who played a much greater role in starting the brush fire the damage of which we are all now paying for. Needless the hedgies continue to insist as they had nothing to do with it why should they come under scrutiny. Bring on the legislation and lets have a really good look at their role in recent events.

  • Comment number 5.

    It's the same argument again, isn't it? The interests of the individual against the interests of the group / society.

    Adicted gamblers are not 100% destructive all the time - it's when things get out of a certain range of activities.

    Insofar as that is the case, that is like many other types of human behaviour. There are many people whose behaviour is just fine, until they lose their temper and then they become violent and end up being sanctioned for behaviour that is harmful to others by the courts and the penal system. Most people drink reasonably responsibly, it's a minority that ever drink and drive.

    So the question isn't whether hedge funds, or globablised banks, or whatever, are good or bad or right or wrong.

    The question is what steps do you take in terms of regulation and lawmaking to ensure that sensible boundaries are put around these things to prevent harm to others. That is, in many respects financial gamblers can go off an do what they like, except insofar as some of the things they do then creates havoc and seroius harm for the rest of society, for customers, for taxpayers and for shareholders.

    There probably is some scope for some type of hege fund activity, but clearly not the way it has been allowed to be in the past.

    And that stance is perfectly reasonable. It's common logic - 'little boys who play with fire get their fingers burnt' and 'once bitten twice shy'.

    Hedge fund fans cannot realistically expect regulators and lawmakers to just leave the status quo in place. It has to change in some way.

    Perhaps, just perhaps, them being banished from Europe might not be that bad an idea. In this globalised world, that won't really put them out of reach of those who want to play that game.

  • Comment number 6.

    A balanced view, but not in agreement on some points.
    re (1) - generally true, although an important point is that the stock market generally values growth over maturity. So many of the mature companies were bought by private equity because the stock market didn't value them highly. Undoubtedly some had too much debt loaded onto them, but they were vulnerable because of low stock market valuation.
    re (3) - any broad based hedge fund index has outperformed both equiites and bonds over the long term in terms of higher returns and lower volatility. Obviously some winners and losers in there, but the same is true of individual stocks.
    re (6) - cannot be emphasised enough. Hedge funds had virtually no part to play in recent financial crises - the problems were all in regulated banks
    re (a) - the vast majority of the buyers of CLOs were banks and other regulated entities, often through off balance sheet vehicles. Without that demand, these "toxic" products would not have got off the ground.
    re (c) - not true. Banks finance hedge funds, not the other way round. It was other banks that withdrew liquidity from Bear and Lehman, forcing their demise, not hedge funds.
    re (f) - short sellers only make money when they are right. They correctly identified that the banks balance sheets were full of bad assets. It is not the short sellers fault that RBS and HBOS didn't know what they were doing. In general, don't shoot the messenger.

    In general it is interesting to see that the major push for increased regulation is coming from countries that have next to no hedge fund or private equity firms (France, Germany), so a painless, populist proposal from them. We should stand firm against this, good to see Boris is.

  • Comment number 7.

    I hope you can do something on Qauntitative easing later today. I find it very troubling and there is a lack of attention in the national press about what a huge risk is being taken with our long-term economic well-being.
    The hedge fund regulation is a diversion, odd how hedge funds have been used to divert attention right through the crisis, e.g. with short-selling, oil manipulation etc. All a chimera.

  • Comment number 8.

    Technically a lot of them "aren't here" anyway - with their actual activities taking place in Bermuda, Caymen etc - the staff may be here but technically they operate out of these places (combination of tax regime and legislative reasons) so they will be a bit harder to shift anyway.

    Also, at last you acknowledge there is a difference between hedge funds and private equity but then go back into treating them the same. They are VERY different!

    Finally - don't jump on the ban short-selling band wagon - remember even in short selling there is a contract in place - eg a buyer and a seller - for every short seller there is someone else willing to take the risk the other way!

  • Comment number 9.

    So we would also chuck out HMG who encouraged massive betting on house prices.

    BTW why should houses not be cheaper? It costs peanuts to build the chicken coops we are sold, but the land on which they are sold is exorbitantly expensive. Where has all THAT money gone....

    We the citizen is a stoopid breed of chicken.

  • Comment number 10.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 11.

    "They've created a bit of high-value employment" which drives up the property price which mean we all have to borrow much more, which drives the demand for borrowing, which mean we are in more debt for longer.

    Hedge funds and private equities must also be judged by the amount of tax the funds, their managements and owners pay.

  • Comment number 12.

    Fair enough, Robert, although we do need greater competition all round between financial intermediaries of any description and that means just one thing - demanding greater levels of transparency and disclosure from them.

    But one would still absolutely need to limit the damage these hedge funds could do to the stability of the system.......you seem to be forgetting the LTCM crisis in your analysis above.

    I guess that means putting a cap on the size of any hedge fund.

    Maybe the gearing issue should be handled from the other end. i.e. the deposit taking banks that us ordinary people have to use that the UK Govt implicitly guarantees should not be allowed to lend to hedge funds. If this rule was enacted it would insulate us mere mortals from the high risk players. It would also drive up the cost of debt to the hedge funds, which would make them have to work a bit harder and would not be a bad thing.


  • Comment number 13.

    What in fact the EU are doing, either knowingly or not, is making London a far less attractive destination for banks and investors, potentially bringing it into line with Frankfurt and Euronext.

    Not great for investment or jobs in the UK. Nice for the Euro and our neighbours though.

    This seems to be more politically motivated than financial.

  • Comment number 14.

    Boris Johnson made the point on 5Live this morning that the hedge funds pay bucket loads of tax to UK plc and that soley for this reason they should be left alone.

    I've had the unfortunate experience of meeting a few of these people and from what I could gauge they ran their companies from non-UK tax paying domiciles whilst at the same time living in places like Monaco themselves so as to avoid paying any UK income taxes whatsoever. As far as I am concerned they are a bunch of blood sucking parasites who add precisely nothing to UK plc choosing instead to create misery by short selling any organisation experiencing temporary difficulties thereby enriching themselves at the expense of commited long term shareholders. Good riddance to the self-serving lot of them I say, we're better off without them.

  • Comment number 15.

    Lets look at comparisons for private equity. If they were inadequate managers of businesses then presumeably over say the last 10 years the businesses they bought would have performed, on average, worse than businesses in the same sectors who were not owned by private equity. Robert, dig out the figures and tell us - my recollection is that the figures published (by the venture capital industry so there will be some bias in them) show the reverse - ie that on average companies owned by private equity perform better, so it is not simply a bet of rising asset prices but a bet on the ability to improve performace.

    Unless you are going to have govt deciding who is entitled to own shares, you can not stop private equity firms buying companies. I would much rather they were in the UK then out.

    As for hedge funds - at best they only played a walk on part in the current crisis so why are they been picked on - is it simply certain Eurpoean countries wanting to strangle London for petty political aims

  • Comment number 16.

    Boris Johnson has just been on the Today Programme on the latest phase of his "Save Europe's Hedge Funds" campaign.

    1 - DO NOT QUOTE BORIS JOHNSON - the man is a bungling fool who is the only person in the world who makes the current Government look competent.

    2 - What Boris actually means is "Save my rich friends who help me and my party get what I want"

    "He fears that proposed new EU legislation will drive hedge funds - and perhaps private equity - to relocate to the US and Switzerland."

    - GOOD RIDDANCE - lets see how the hedge funds get on with European legislation which is going to be even tougher than here. I must have missed the part where the Government started giving into blackmail as a policy because it's folded with the banks and now is it going to do the same with the Hedge funds threat of exodus?

    "And he's probably right. Hedge fund managers tell me they hate the combination of the additional bureaucracy and the probable restrictions on how much they can borrow that's contained in the legislative draft."

    -- I bet they are - how about we all don cowboy hats and get on our steers and 'shoot up the town'.

    Just ask some of the employees of existing / past hedge funds on how they work. I have experienced working for one and it's literally boundaryless gambling.
    The lack of control spreads as I discovered 3 months after leaving one of the desk jockeys had been syphoning off 2.5 million into his own personal slush fund.
    - what was the result? He was removed promptly but without re-course as the hedge fund did not want the adverse publicity.

    Ask the employees of New Star how happy they are at loosing their jobs whilst their 'leader' walks away to set up another one.

    Ask the people who lost millions in the LTCM scandal of the 80's, or the people who have lost more with Merriweathers latest failure.

    If this was in the real world these people would be charged with obtaining money by deception.

  • Comment number 17.

    What will banning them achieve when they can just relocate to (insert any other location here) and still do exactly what they've been doing on the UK stock exchange?

  • Comment number 18.

    Not sure they add value to our economy a lot are heavily geared and thus pay little tax.However better to have them here,rather than in a tax exile.
    However with the pressure Switzerland is coming under with the USA,the hedge funds may be surprised on the number of tax havens about in 5 years.

  • Comment number 19.

    It is regulation which will force these companies abroad to, by definition less regulated countries where they will still be able to ply their trade on these shores but outside of any control from GB or the EU, I think this is a classic case of better they are in the tent p'ing out than outside the tent p'ing in.

  • Comment number 20.

    People are certainly somewhat misinformed over who benefits from private equity and hedge funds performing well.

    Management fees charged on private equity and hedge fund investments tend to be around 2% of committed capital, or less for some of the bigger private equity funds which charge around 1.5%. Private equity firms do not receive the rather more lucrative (typically) 20% of profits on investments unless the overall performance exceeds a predetermined level, typically of around 8%.

    Once the fund is performing well, the manager certainly stands to do well, but the profits that they are making are pretty small in comparison with the huge value that can be created for the investors in the best performing funds. Who are these investors? Are they just rich people? NO.

    The amount of high net worth capital in private equity funds is minimal. By far the largest contributors to private equity are the public and private company pension plans that have been formed to benefit normal working people. Within hedge funds the make-up of the investor base has become much more institutional in recent years, and again, their good performance stands to benefit ordinary working people (albeit indirectly).

    Here are just a few examples of public pension plans investing in private equity in the UK (with £100mn - £1bn in private equity each):

    Universities Superannuation fund, Strathclyde Pension Fund, West Midlands Pension Fund, West Yorkshire Pension Fund, Greater Manchester Pension Fund, Tyne and Wear Pension Fund, West Sussex Pension Fund, Norfolk Pension Fund.

    Here are some private sector pension plans (with around £300 to £1bn in private equity each):

    Coal Pension Trustees Services, BP Pension Funds, Railways Trustees Pension Funds, National Grid UK Pension Scheme, BBC Pension Trust

  • Comment number 21.

    Not only do hedge funds and private equity companies not provide a particularly socially useful function but neither do they help grow and broaden our economy. In general they create nothing new and PE companies in particular have done a lot of damage by diverting real venture funds. The classic example was of course 3i which moved away from funding start-ups and spin-outs

    So - unless both hedge funds and PE companies are prepared to play the company creation business by providing meaningful chunks of risk equity capital then I see no point in doing anything but regulate them out of business. They may well have been good at identifying irrational exuberance in markets but so what.... They didn't do anything about it that wasn't for their own benefit.

  • Comment number 22.

    Robert,
    If I may put the case for the prosecution:

    1) They help the distribution of capital to those who can use it most productively.
    ------------------------------------------------------------------------
    - A Capitalist myth, the suggestion that 'we know best what to do with your money' doesn't go very far these days. It's clear from the collapse of securitised debt that high wealth owners no very little about the best distribution of capital. If this was true then why don't any of the hedge funds invest heavily in companies working with sustainable energy production? - A. because there is no short term profit. What do we have to show for their 'wise investment decisions' - oh a piece of worthless paper with a promise that cannot be fulfilled.
    What about the CAPITAL DESTRUCTION going on at the moment? Is that represent a good distribution of capital? Don't make me laugh.

    2) They contribute to the liquidity of markets.
    ------------------------------------------------------------------------
    The contribution to liquidity is dramatically offset by the penalty of speculation (as the Oil markets prove). This is also a bad argument as 'creating liquidity' is about as useful as 'creating consumption' - which is why we're in the brown stuff now. It's all about creating a false impression in the market of 'good times' - which can be exploited by those who create it by tempting others in and getting out before the game is up.

    3) Over many years, their investment performance has tended to be rather better than that of conventional fund managers etc.
    ------------------------------------------------------------------------
    Over what years? What measure? The reality is the Hedge funds appear to be better performing because they take bigger risks and therefore reap bigger rewards. However as all good gamblers know, if you keep betting more and more on long shots, eventualy you have a huge loss - and that's why Hedge funds collapse - they go BANG. They also have only been around since 1949 - they weren't around in 1929 and we've been ina post war boom since 1949 - coincidence????

    4) They've created a bit of high-value employment in the UK
    ------------------------------------------------------------------------
    Same old Capitalist argument - 'Hey look we created jobs with the wealth we extracted from you in the past - aren't we generous and good?'
    Building hospitals 'create high-value employment' - both socially and Economically - hedge funds only create Economically high wealth employment - because there are no life savers in a hedge fund! for evey job created there is capital extracted into the hedge funds pocket. The jobs are saved for the few and created from the income of the many.

    5) They knew about it because they were causing it Robert - Come on, don't be so Naeive - see end of point 2. Lets not get too over-impressed by the press releases of these hedgies. I haven't forgotten that Buffet - 'the Sage of Omah' called the bottom of the oil market way too soon this year and it's cost his investors (and him) millions. It's always easy to look good when you only publicise your successes and not your failures (it also helps having a media who no longer get their own stories but read them out from the marketing departments)

    6) Maybe true - but the big banks got into trouble because they COPIED the behaviour of the hedge fund. The BIG DIFFERENCE is that if a hedge fund fails it's usually too small to make an impact....but a bank....well you already know...

    Hedge funds, PE and the financial system as a whole is designed to take minute amounts of wealth from individuals but applied to a massive numbers of people. This wealth is then used to further increase this process until we end up in a situation where the 'wealth of nations' is controlled by a 'small set of dictators' - who slowly enslave us all in their chains.

  • Comment number 23.

    to killthehedgies - assertion dressed up as fact. "Well accepted" by whom exactly? Fourth sentence a non-sequitur, the point of which escapes me. Significant investors are pension funds and insurance companies, i.e. indirectly us, not some shadowy conspiracy as you imply. "RBS and Lloyds... some errors of judgement".. masterful understatement. Please explain why lending 100% mortgage on 5x income is the hedge funds' fault.

  • Comment number 24.

    #1 flamepatricia
    "Listen well to Boris. He is one very very clever astute man"

    You do yourself no justice making absurd statements like that. Do not confuse 'laughable' with 'clever'.

    You obviously don't live in London either or you would be aware tha this 'clever astute man' managed to rack up £4000 in taxi fares in about 3 months after winning the election based on 'removing corruption and waste from City hall'


    ....only a true idiot could pull that off....

  • Comment number 25.

    #5 sutara

    "The question is what steps do you take in terms of regulation and lawmaking to ensure that sensible boundaries are put around these things to prevent harm to others"

    This is the whole crux of the matter. hedge funds were created and made popular in order to 'get around the legislation that restricted banks' (I can't do italics).
    You can put in all the laws you want, there are not enough people to enforce them and there isn't enough that can be donw to keep up with the financial industries constant innovation.

  • Comment number 26.

    For once i completely agree with Boris. The city has the infrustructure a wealth of skilled, loyal and hardworking workers who should not suffer as a result of the few who took irresponsible risks, or the actions (lack of actions) of incompetent regulator . Competent regulation is a virtue, excessive bureacracy is not effective regulation and will only harm the city.

  • Comment number 27.

    Interesting post Robert. Have to say it is fairly well balanced, which is refreshing as I would not often agree with your posts.
    Whilst the critiscms of Hedge Funds are fair, as would be expected from a poster I would question a couple of points:
    A & C is pure Fiction
    Anyway. A - Hedge Funds did not create the market for CDOs and CDS, although much maligned now these instruments do actually perform a true financial function. I know everyone will scream about CDOs so get on with it.
    But CDS are merely Insurance, what's wrong with that. If Underwriters write too much business that they can't cover, that doesn't mean the principle is wrong just the underwriter.
    And C - Very, very dubious interpretation of the Liquidity Markets, and incorrect in parts.
    Robert wrote 'they in turn were an ATM for investors who were able to demand their cash back at a moment's notice'
    Hedge fund clients can't demand their money back at a moment's notice, so your point is invalid. The majority of Hedge Funds are only open for client trading once a month, and most impose redemption timetables ranging from 7 days notice up to 9 months, some even have the ability to suspend redemptions.
    So to summarise hardly a moments notice.
    Shame about these two points, as they have tarnished an otherwise reasonable and balanced summary of the pro's and con's of Hedge Funds and Private Equity.

  • Comment number 28.

    luckyjim65

    "In general it is interesting to see that the major push for increased regulation is coming from countries that have next to no hedge fund or private equity firms (France, Germany),"


    ...and just remind us who is 'best placed' in this recession? Would it be Germany and France perhaps? Do you not think these two things might be related?

  • Comment number 29.

    Boris's opposition to any meaningful regulation of hedge funds makes it crystal clear, if any further clarity was needed, that the Conservative Party is effectively the political arm of the City, and thus entirely beholden to the City.

    Labour is morally bankrupted because they have been cowed by the City, however the Conservative Party has no morals to bankrupt in the first place.

    What the country needs is a period of reflection about how to break the hold of the finance-driven mindset on our governing classes - neither Labour nor the Tories must be allowed to exercise any further power for the next decade or so, until they have had plentiful opportunity for repentance - therefore the only meaningful vote at the next two elections is for the Greens.

  • Comment number 30.

    Cripes!

    An hour to moderate a post, and then told it broke rules.

    The idea of a blog is it flows with the posts, with such a delay present it makes the blog pointless regardless of content being useful or not.

    Come on Moderators pull your fingers out!

  • Comment number 31.

    @ 5 - Sutara makes a good point - hedge funds in themselves aren't destructive (effectively a hedge fund can be like any normal fund but with less restrictions in where it can invest) it was the increasingly lax and risky activities of the managers themselves that caused any issues related with the "negative aspect" of the hedge funds - this can cause problems and we do have a situation where "if you can't play nicely then we will take your toys away" however it doesn't mean that hedge funds don't have their place. The funding and leveraging that were carried out in SOME funds was pretty crazy but then again the repackaging and valuation/rating of debt was equally crazy and this wasn't just the hedgies (yes I am looking at you Mr Investment banker).

    Look at the worldwide impact of the financial crisis - you can banish hedge funds from our shores (and see my earlier point about where they are located now anyway) but can we ban their activities? Wouldn't that involve a severe restriction of inwards investment? Can we really banish them? I can't see how it would practically work - you can banish the workers but not the flow of funds

  • Comment number 32.

    If you have a headache the removal of the head may be a populist solution, but not necessarily the correct one.

  • Comment number 33.

    There's a very good case for requiring a great deal more disclosure of the gambles these types of institution take. Because their personel also have Limited Liability.
    Managers and directors of both hedge funds and private equity use the cover of having Limited Liability protection from their own bad bets and debts. Which means there's asymmetric risk sharing: if their punts make money they take the majority profit and pay interest to their bankers; if they lose money, their Limited Liability status protects them from their losses that are then transferred to their bankers.
    That's bad enough, but the individuals and directors of the banks don't bear the risk either. It's the banks shareholders who end up with the losses, AND taxpayers who're sometimes obliged to bail-out those gamblers' debts.
    So the path to better regulation and a lot less gambling is to require more transparency. The Hedge Funds and Private Equity won't like that because it will enable others to coattail on their shrewd speculations without paying the cost of their researches.
    That's a pity, but a necessary pre-caution as their payment for their public privilege of Limited Liability status.

  • Comment number 34.

    #1. flamepatricia wrote:

    "Listen well to Boris. He is one very very clever astute man.

    He may well have the keys to No. 10 one day."

    I disagree with you on every point that you make.

    Boris is an embarrassment as Mayor. He lets London down in every possible way from his arrogant refusal to button his jacket in Beijing onwards.

    Luckily, not even the Tory Party is stupid enough to select such a defective person as its leader.

    He is totally enthral to the last person with lots of money who sat on him. This week it was Hedge Funds!

    As to Hedge Funds: we could well do without them as all they do is siphon wealth from the majority of the British people. To make special provision to keep them here is to run the country for the benefit of the very few tax exiles at the cost of the poor!

  • Comment number 35.

    Hedge funds are indeed hated.
    Capitalism in the raw.
    You make a fat profit out of success, and you make a fat profit out of failure? (Just by being quicker than anyone else).
    Does that really help the economy?
    Or is it just parasitic?....using international money to feed on the UK economy? I don't know.
    Perhaps, like many banks, they are just too big, and can actually "manipulate" the outcome of what they are betting on.
    Are they actually of any use whatsoever to Fred the bricky from Bolton, or Brenda the shop assistant from Bristol?....or is Europe doing us a big favour by trying to get rid of them?
    Boris doesn't think so. Perhaps he has reasons that we don't yet know about.
    Hedge funds do have one thing in their favour.....they absorb their own losses, and don't come running to the taxpayer for help.
    But nevertheless the UK population is getting the strong feeling that they are being sucked dry by the City,... the "masters of the universe" are thoroughly disliked.

  • Comment number 36.

    #14 Thanks for your clear statement Geoff. It is amazing how simplistic propaganda ('hedge funds pay taxes') and a naive sales man like Boris ('hedge funds have money so they must be good for London') can in this day and age still impress some people.
    Why exactly is it good for London that you have to pay £400.000 upwards for a small home in a decent neighbourhood? Without the oversized, undertaxed and overpaid 'financial services' industry in London house prices would be a fraction there and ordinary people could actually enjoy living in London.
    Would that not be a much better goal for a London Mayor to pursue?

  • Comment number 37.

    Boris is spot on.

    The backlash against financial services has been driven by Labour politicans keen to blame bankers/financial services to shift blame away from their ruinous and profligate spending. Lots and lots of "non-jobs" (all of course with final salaries)

    Think about it this way: would the French ever allow any EU directive to be born that hurt agriculture, or the Germans for cars?

    In the UK we have a large financial services sector. This is not something to be ashamed of, but rather to be proud of. It generates billions in service exports. Good on Boris for standing up for the City. It has taken decades to build a Frankfurt and Paris beating financial services industry. Dont let Gordon Brown destroy it for short term political advantage.

  • Comment number 38.

    Luckyjim - the big banks bought into the toxic stuff in part because investors wanted higher interest on their deposits. When you buy stuff that has been given a triple A rating you it would seem foolishly assume that the stuff you are buying is worthy of this top rating. So yes -some errors of judgment - they should have known what they were buying rather than relying on the "independent rating agencies" research capabilities. What is truly staggering is that Morgan Stanley and Goldmans have again taken mortgage debt and CDO's to the rating agencies and have secured yet another AAA rating for this and have started to peddle it again. Secretive sure lets have things out in the open lets have the same rules for all. If they don't like it - tough. enough said I think

  • Comment number 39.

    Who needs Hedge Funds - noone.They are organisations trading in betting slips -just like bookmakers who,to their credit, have the moral superiority over hedge fund Managers because bookies quote the odds and do pay up for winners.Short Selling - how is it that people who do not own shares can sell them and why do pension funds seek easy money[they think] by lending shares -when they do my view is that the Pension Trustees are in breach of their duties.Let them all go to Switzerland and suffer the regulators there and save us the expense of policing those who make nothing and help to create financial crises.

  • Comment number 40.

    As someone who works frequently with both listed and Private Equity-owned businesses, I think Robert is missing one key point: because Private Equity-owned businesses tend to have only a handful of major shareholders, those shareholders are much better able to make sure the company is focused on value creation. They also attract the best managers because they are happy to pay for that value creation.

    It is simply very difficult for the public equity markets to hold big businesses to account effectively with the amount of information made available to their shareholders.

  • Comment number 41.

    From the content of some of the posts on here, I'm not sure that some people know enough about Hedge Funds, how they are structured or how they operate, to post a sensible comment on them.
    Looks like people are still acting like 'Mushrooms'.
    Listening to and beleiving the Spin Doctors, Peston on behalf of Brown, and the rest of the 'Hang the Bankers' Brigade transferring blame like a commodity, isn't going to help you understand what happened or is actually happening now.

  • Comment number 42.

    Why shouldn't hedge funds be regulated just like any other financial entity? Banks etc have to be regulated heavily and likewise hedge funds should be too.

    The 'myth' that they will move is if regulation is put in place is a 'masquerade'. They need to be near their clients (the big ones - banks, pension fund managers etc). If these clients move they would have to move. I seriously doubt they would move to geneva if hedge funds were regulated more. The Hedge funds need to be close to the movers/shakers of the markets, not in the mountains of Switzerland.

    Also, hedge funds increase the volatility in the market (thats how they make money). Its in their interest to have high volatility, and a great many of them participate in activities that increase this (rumour milling etc).

    No doubt many of Boris's friends/supporters are in this industry, hence him becoming their poster boy. But lets not get sidetracked. If we as a society want stable long term markets Hedge funds should be regulated just like anyone else.

  • Comment number 43.

    Well I for one want the hedge funds gone because they are shorting Lloyds and RBS shares down after I have bought them and want them to go up. Pack it in fellas, your initial shorting was excellent for me but now I don't have any more money to put in so move on and let the shares go back up to where they belong

  • Comment number 44.

    9. At 10:49am on 09 Jul 2009, bimthedandyandy wrote:

    "So we would also chuck out HMG who encouraged massive betting on house prices."

    Actually, at risk of venturing into Nick Robinson's blog's area, if there were a legal / paliamentary / democratic mechanism by which the Government could be chucked out, I suspect you would have a lot of people who would agree with you .... though perhaps not just for the reason you suggest.

    But the point is not about punishing people for past antics.

    It's about the financial industry - like society generally - having sensible boundaries put around it in order to prevent a minority of people within it causing serious harm to their customers, shareholders, the taxpayers, and their industry.

    Regulation and lawmaking can never be 100% perfect - it's another version of risk management. The objective is to try to limit the ability to do harm.

  • Comment number 45.

    #11 puzzling
    ""They've created a bit of high-value employment" which drives up the property price which mean we all have to borrow much more, which drives the demand for borrowing, which mean we are in more debt for longer."

    This is a perfect example of the Capitalist LIE. You are absolutely right that the high value employment is limited to the few. Isn't it better to create 4 'average value employments' than a single well paid job?

    It also brings into question yet again what 'value' is. You may think the hedge fund worker is high value because he gets paid more - but in reality and in the essence of 'usefulness to society' - he is no more valuable than the bin man on a hot summers day.

  • Comment number 46.

    Excellent posts by writingsonthewall, especially #22. IMO hedge funds are simply the means of making money where no wealth is created. The City desperately needs to be shaken out of its casino mentality and in the UK all encouragement should go to those who really do make us wealthy instead of those who fool us with smoke and mirrors.

  • Comment number 47.

    32. At 11:58am on 09 Jul 2009, Blogpolice wrote:

    "If you have a headache the removal of the head may be a populist solution, but not necessarily the correct one."


    Popular or not, most people with a headache take some sort of remedial action.

    We have a headache. That headache is the potential for harm that these organisations can do to individuals and society generally. It seems therefore to be appropriate to take some remedial action.

    Banning them from Europe - even if that happened - would hardly be the end of hedge funds, many of which really operate from various remote places for tax reasons and because the financial regulation in those places is less sophisticated.

    What the UK needs to be particularly cautious of are the consequences and sequels of their actions that would impinge upon either UK society or on banks that the UK Government would have to bail out.

  • Comment number 48.

    Did hedge funds really contribute that much to corporate investment apart from allowing high income lifestyles to proliferate often without much return into society as a whole? Can somebody stand up and categorically say that 'x' tens of thousands of non-financial services jobs exist because of it?

    And why should we worry if all this high risk activity goes elsewhere? Maybe next time (and there will be one) we won't get quite so trodden into the dirt because we've created methods of financing that allow us to maintain standards of living without sitting us all under an inverted pyramid.

  • Comment number 49.

    once again financial decisions based on politics... a recipe for disaster, see current problem with UK economy! it was politically useful to fuel the boom...prices had nothing to do with the real economy and everything about staying in power...

  • Comment number 50.

    #15 Justin150

    "ie that on average companies owned by private equity perform better"

    ...but your analysis doesn't take in the full picture and true costs to society.
    I can make any company perform better by cutting every 5th worker, driving down the costs and quality of what is produced. The workers who are left will have to pick up the overspill of work - especially as they now fear for their jobs. However in the long term they will look to get out of the company and take their employment elsewhere (which is exactly why PE only concentrates on the short term)

    All I have done is MOVED the inefficiencies to the dole queue and the consumer.

    Show me some analysis that encapsulates this and I will agree with you.

    It's the same old faulty Economics - if you can't see where the cost has gone - then you must have got rid of it.

    WRONG - the cost is simply shifted elsewhere - and that elsewhere is usually the taxpayer or the consumer.

  • Comment number 51.

    It woudl be very wise for Switzerland to have the same financial regulations and taxation systems as EU. Otherwise, serious questions may start to be asked as to how much of Switzerland's and Swiss bankers prosperity are gained at the expense of other countries and continents, perhaps to the tune of several $trillions over the decades?

    Collectively as a industry and profession, hedge fund and private equities are very useful. So are most other industries and professions.
    Just we try to do without garbage collections, electricians, coffee bean growers ... or even financial journalists !

  • Comment number 52.

    25. At 11:51am on 09 Jul 2009, writingsonthewall wrote:

    "This is the whole crux of the matter. hedge funds were created and made popular in order to 'get around the legislation that restricted banks' (I can't do italics).

    You can put in all the laws you want, there are not enough people to enforce them and there isn't enough that can be donw to keep up with the financial industries constant innovation."


    You can restrict the ability to finanically innovate, by setting down practice 'standards' which need to be kept to by the funds or they would risk significant sanctions against them.

    I've said it before, people should not realistically expect that hedge funds, as they were before the downturn, will continue to exist. I think they will exist in some form, but that it will be a changed form.

    Changed to just what degree is yet to be seen.

    In view of some of the damaging effects that hedge funds have had, it is surely clear that international governments are likely to 'rein them in', to some degree in some areas of their functioning.

    My guess that there is room for some type of reasonably well managed hedge fund to continue to exist - but clearly some of the poorly managed ones are a real danger to everyone's financial stability.

  • Comment number 53.

    23. At 11:45am on 09 Jul 2009, luckyjim65 wrote:

    "Please explain why lending 100% mortgage on 5x income is the hedge funds' fault."

    Allow me to explain luckyjim65.

    The hedge funds invested and used riskier products - in return they got bigger rewards. However as the world has a serious problem understanding RISK (and I include the banks in this) the perception was by the investor that banks were no longer a good investment - hence the leaning towards Hedge funds.

    In order to make up this gap the banks had to take bigger and bigger risks, they did this by investing in products they didn't fully understand (CDO's CDS's etc) - but which provided a competitive return. As well as stretching out the mortgage multiplier (as you pointed out).

    Now you may blame the banks and claim they shouldn't have done that - but I point to the very real data they were facing which was that more and more people were shunning traditional banking and heading for the fantastic returns of hedge funds.

    I call it survival - survivial in the capitalist Economy.

    What is it the free market fools quote? - survival of the fittest.

    Is it clear how this house of cards gets constructed now? Of course it wasn't solely the hedge funds fault - but also central banks who foolishly thought they were controlling inflation (where as it was in fact a flurry of cheap imports from China that kept prices low).

    Of course no-one will admit to this because once the cat is out of the bag everyone will start to question what the hell we're doing with our Economies - and more importantly why.

  • Comment number 54.

    How can everyone use the means of exchange (money) to make more money?

    Can everyone do that? Who will make the dinner tonight?

  • Comment number 55.

    36 invisible hand advisor wrote:
    'Without the oversized, undertaxed and overpaid 'financial services' industry in London house prices would be a fraction'
    Absolutely spot on!
    Houses would be very cheap, as London and the rest of the UK would be broke without the Financial Services Sector. Look at the level of tax raised in London and the amount of tax spent on London, the first is and has been for decades much larger than the second.
    As for all the new Hospitals, Schools, and Public Sector Final Salary Pension Schemes. Who would have paid for those???
    Still believing the Spin from the Govt then???

  • Comment number 56.

    Lets not look at hedge funds as being the reason for high property prices please - that is a combination of easy credit, buyer behaviour and over-population in the UK - not a handful of wealthy individuals (whatever the source of their wealth)

  • Comment number 57.

    We can drive out hedge funds to switzerland and then regulate against antyhing Swiss - they ar enot part of Europe therefore should be treated as the pariah nation they are - and as for the US good luck in find liquidity and a non regulated market there.

  • Comment number 58.

    Sutara

    I'm not picking on you specifically - but a lot of people make this similar comment.
    "Banning them from Europe - even if that happened - would hardly be the end of hedge funds, many of which really operate from various remote places for tax reasons and because the financial regulation in those places is less sophisticated."

    Now we ban drugs in this country, and the result is that the drug dealers operate from outside the UK (because the criminal regulations are much less sophisticated).
    If we apply the same logic as is suggested for hedge funds then we should legalise drugs and stop the wealth leaving the country (which is what happens) - or allow them and regulate them (but not too much) so we don't loose the tax receipts.

    So why isn't it so? - just think about it for a minute.....and more importantly who is saying we shouldn't let them go....

  • Comment number 59.

    48. At 1:31pm on 09 Jul 2009, p45builder wrote:

    And why should we worry if all this high risk activity goes elsewhere?

    Excellent point p45builder.

    Lets see how a smaller Economy - like Switzerland or Luxembourg handle the collapse of just 1 hedge fund - a la LTCM.

    They can all go, because the first recession that comes along will bankrupt the country in which they are operating - such is the magnitude of positions taken up by hedge funds - doesn't anyone remember the VW / Porsche sting?

  • Comment number 60.

    53 writingsonthewall
    A very plausible explanation, if that is the view you want to beleive.
    However it is somewhat flawed, in that Hedge Funds do not directly compete with Banks, their trading models are rather more complimentary.
    So passing the blame to Hedge Funds for the follies of the Banks is completely untrue.
    But that's your view, I have mine.
    Life would be boring if everyone was the same.

  • Comment number 61.

    I work in the reinsurance business. In recent years hedge funds have put substantial capital into providing catastrophe cover to major insurers across the world (such risk is relatively uncorrelated with much of funds' other investments). The result has been to moderate the pricing from traditional markets for this business. Had they not put capital in, global reinsurance capacity would have been much tighter which would have driven up the price that insurers pay to protect themselves against quake and storm. Those price rises would then have been passed on to the consumer.

  • Comment number 62.

    I would like some people on this post to read up on the history of futures and short selling.
    Initially futures contracts were brought in for a perfectly acceptable reason - to manage the unexpected weather events which affected commodity prices and could lead to farmer bankruptcies. Locking yourself into a future price allowed the farmer to plan longer term.

    Go from there and look at what we have today - futures on financial instruments which are subject to fluctuations caused by man-made events.
    This is where futures went wrong, they stopped becoming insurance for commdity producers and became bets where the result can be manipulated by those with enough wealth.

    I can take out an index future today, and with the help of the central bank / Government or some of my 'wealthy friends' - I can massively reduce the odds on me loosing.

    Sadly whoever is on the other side of that contract is simply the poor patsy who gets burned. If this was an individual there would be a court case - however as this is spread across all the pension holders and stock ISA's and other investments - there is no one individual that looses enough to make it worth bringing a case.

    It's simply the £1 scam - con a milion people into giving you a pound and you're a milionaire - no single person will be incensed enough to take you to court over a pound - it becomes a perfect crime.

  • Comment number 63.

    I'm sorry but.....
    Who cares what Boris Johnson thinks?
    Unless you live in London (which I do not) I am not in the slightest interested in his opinion.

  • Comment number 64.

    Surely, in a globalised economy, the location of any Hedge Fund or Private Equity Fund is utterly insignificant. If the Globalised Economy does work as claimed, that is. If, on the other hand, Hedge Funds and Private Equity Funds are sensitive to geographic location it seems fairly obvious the Globalised Economy is not "fair and equal" that there is work to be done to level that playing field. Given the massive instability that Hedge and Equity is known to cause, the only sensible reason to keep them geographically fixed is to stabilise the local economy. Surely, that would be better achieved by excluding those Hedge and Equity that are sources of instability.

  • Comment number 65.

    #54 JavaMan
    "How can everyone use the means of exchange (money) to make more money?"

    It's no good - they don't understand - too many people can't be bothered to think about it hard enough and are quite happy to trust someone else.

    If I dig a diamond out of the ground, spend a month cutting it and inserting it in a ring, when I sell it in my ring shop it wil be worth:

    The value of the uncut diamond (i.e. the labour to find it and dig it out)
    The value added by my labour
    The value added by the provision of a shop - so the shopper doesn't have to come down to the factory - and any sales patter, customer service etc.

    ....so why do people then think re-selling this ring over and over makes it 'more valuable'.

    I believe this is where all the historic asset bubbles start. It's all about the perception of value - and when the perception dissipates.......well we're seeing the effect of that right now.

    The element of scarcity in Economics is a ruse - not that scarcity (or rather perceived scarcity) doesn't play a part, but the reality is of all the worlds resources nobody actually knows how much is left - so scarcity is only a perception - and often a locallised one.

    To illustrate:

    When the western man offered his gun for an ounce of gold to the Incas - the Inca's readily accepted because to them the gun was scarce (never seen before) - but gold was abundant. Whereas the western man knew that globally gold was scarce and guns were abundant (and an ounce of gold could buy a thousand guns).

    The Capitalist would write this up as a trade that 'benefitted all parties' - however the truth is that the western man benefitted as he had the knowledge.

    If the Inca had full market knowledge then this trade would never take place.

    ....and that my friend is how the Capitalist makes his profit...

  • Comment number 66.

    I admit, up front, to a high degree of bias here but it doesnt bother me if Hedge funds and VC dragons (PE firms) are 'forced' out of London. First of all they must take a lot of the blame on themselves for the reasoning behind this potential legislation; if they had demonstrated some more self governance and ethical discipline there would be no need for it. Secondly, VC's have seriously abused our tax system under Browns deregulated environment for a many years; loading the firms they 'buy' with debt thereby reducing enterprise taxable profit and maximising their funds tax-beneficial profit for personal gain, thirdly, VC's are vicious when it comes to feeding off the blood, sweat and tears of honest entrepreneurs to make themselves rich .... and take the glory.
    So for me it would be good-bye, good-riddance and glad to see you go!
    We may then get an entrepreneurial business environment that could be based on real value creation as opposed to the plastic Balance Sheet financial engineering that 'the city' is shamefully renowned for.
    I guess the only problem for Boris is he would loose a lot of his cronies and backers?!

  • Comment number 67.

    #45. writingsonthewall wrote:

    "Isn't it better to create 4 'average value employments' than a single well paid job?"

    Better for whom?

    Better for the four average-value employees, certainly, but unlikely to be better for the company if none of those four employees can do what the one well-paid employee could have done.

  • Comment number 68.

    59
    Don't think Lux will have anything to worry about, as their in the EU. Hedge Funds leaving London to avoid the new EU regulation, won't pitch up there.
    Don't recall the 'VW/Porsche sting' bringing down any countries, but feel free to enlighten me.

  • Comment number 69.

    Does Europe need hedge funds lets just chunk up a couple of logical levels when we address this question.

    Let me begin with a simple analogy. If the shortest route between two points is a straight line and a group is presented with two options to get to a given destination would anyone really assume that they would take the long way around?

    So why then when cheap money is in abundance and everybody can afford to buy what they want, would we assume that everybody would take the long way around and simply save more and actually spend less?

    Therefore if an individual is not motivated to take the long way round by saving rather than spending why should any institution like a hedge fund, private equity fund or corporation be any different? Society and culture does not operate that way as both the individual and the corporate in western society at least, tends to strive to maximise their utility.

    When you bought that new phone, game boy, second car, larger house, private education who made all those decisions? Those decisions were under your control nobody physically forced you to take those goods or services -and even if peer pressure and slick advertising helped contribute to your decision process, you were still the individual that signed the cheque.

    Lets be realistic here personal balance sheets are to a great extent a mirror image of the balance sheet of the organisations that provided the finance. Its not a question of which came first like the old chicken or the egg argument as both parties are certainly mutually inclusive. You cannot have one without the other.

    Hedge funds, banks, governments and individuals all had one thing in common as the markets turned in that they all shared the same common belief that free money and the good times would roll on forever. The problem with beliefs however, is that they are set at a higher logical level than many other factors that drive our lives and hence as with all beliefs they are limiting. This means that no matter what new information we are exposed to our belief continue to dominate. Religion and politics are two common areas where beliefs are limiting. And as we all know Lemmings also have a problem taking in new information as they belief the one in front knows where he is going.

    It only takes a little reading into historical financial events to highlight that todays situation is not unique, it has happened before and it will happen again if not in our lifetime, then certainly in that of our children. Read if you will Confusion de Confusiones by Joseph de la Vega, or Mania, Panics, and Crashes by Charles P Kindleberger. They are an enlightening read and will I am sure highlight to most people that what we are experiencing today has already been seen many times before.

    Its time we chunked up to a much higher logical level and stopped looking at whom to blame for this mess. In the west we are accountable for our capitalistic tendencies just examine our daily use of metaphorical language - Time is money, I cant spend the time are just a couple of examples. Money and the drive to have it has corrupted our DNA in the west, its time we look to the future and decide whether we are not due for some genetic modification

    Does Europe need hedge funds? Need is a strong word but if we take it back to the most basic level I can eat food, but theres little taste in a hedge fund. A hedge fund is a collection of people doing a job, hedge funds may not survive long term, but hedge fund strategies (how they trade) I expect will endure. After all, giving your money to a long-only traditional asset manager that can only buy (go long) assets such as stocks, bonds or commodities does tend to make the pyramid trade look rather popular. If the market goes down I do not care whether my manager is down 20% versus the market which happens to be down 30%. After all, he still lost my money! I can do that very nicely myself thank you.

    In conclusion we are all stakeholders in the downfall either in a small or a large way. Persecution, whether on religious, cultural, political or financial grounds never, and I mean never, delivers the required result. The questions we should be asking are - What is it we want for our future? Is it achievable? How do we know its achievable? Whats our evidence? Are we prepared for the costs and consequences of this new future? And if we could have our new future now, would we take it? Hedge funds in Europe please lets all move on.

  • Comment number 70.

    Writingsonthewall

    Which element of hedge funds are you against and want to ban? Remember that one of the differences between hedge and regular funds is the scope of the investments. Some hedge funds do nothing more complex than invest in equities - indeed some hedge funds will only invest in supposed ethical companies. Some just invest in bonds, some in start-ups, some in tech? Not all hedge funds operate with a high risk profile - some are even nothing more than glorified tracker funds. One of the advantages (and disadvantages) of hedge funds is the unrestricted nature of investment opportunities they can go into - generally the investment strategy of any particular fund is set out in its initial proposal and set-up documentation and they will stick to the strategy they advertised.

    As Sutara correctly points out - this is all fine - hedge funds have their place. Basic funds do not have the ability to necessarily invest in certain areas - the hedge funds are just an extension of where the investors themselves wish their money to be placed - just a vehicle for investment. The issue got into the expectations of increasingly large returns, a boom market and an excess of credit available to fund managers (and bonus strucutre) which meant that the managers of funds were more interested in being involved in the high risk/high reward/high bonus funds and not the ones which were based on lower risk/smaller growth. These were also the most popular with investors who saw this large return and wanted some of the action (ignoring their basic investment principles) - everyone got lost in their own excesses.

    Hedge funds have a place - their status has been knocked which will constrain the excesses for a while. It's not a case of getting rid of them but one of increasing the dialogue/disclosure between funds and investors in terms of risk and methods of investments.

  • Comment number 71.

    55. At 1:43pm on 09 Jul 2009, islider55 wrote:


    "Houses would be very cheap, as London and the rest of the UK would be broke without the Financial Services Sector. Look at the level of tax raised in London and the amount of tax spent on London, the first is and has been for decades much larger than the second."

    Don't you think this has got more to do with the historic migration of wealth towards London (being the capital and an inland port) as well as it being the centre for the biggest employer of all - the GOVERNMENT?
    All the current taxation levels reflect is an attempt to re-distribute that wealth. Don't be believing your own press and think London actually 'creates wealth'. Take away the financial industry and London produces very little - there is very little manufacturing here and not a lot of farming.

    "As for all the new Hospitals, Schools, and Public Sector Final Salary Pension Schemes. Who would have paid for those???"

    Well my friend, do you think buildings are built by money? The last time I looked 'money houses' blow away in the wind too easily. Bricks, mortar and LABOUR build hospitals and schools. If the hedge fund managers weren't so useless at practical things they could have got hold of a mortar board and a trowel and started building.
    The comment about final salary schemes shows your lack of understanding of the situation. Let's play along and suppose the hedge funds did actually pay tax - and that some of it went to funding a FSP. The pressure on FSP's has come because of the inflated Economy the Hedge funds have helped produce. If we didn't have the hedge funds then the FSP (and in fact wages) would only need to be a fraction of what they are needed to be - as the hedgies help keep wage inflation artifically high along with inflated asset prices - further pushing up wage demand inflation.

    ...and that's all assuming the hedge funds actually pay tax and that it ever finds it's way to any Government FSP ( which I very much doubt)

  • Comment number 72.

    #56 Horned_Devil wrote:
    "Lets not look at hedge funds as being the reason for high property prices please - that is a combination of easy credit, buyer behaviour and over-population in the UK"

    The hedge funds DID contribute to the high property prices in London (I know, because a lot of the employees live near me) - although the effect in the reast of the country.

    Over-population is the real mis-conception.

    I understand there are 500,000 homelss people in this country - and yet over 1 million vacant properties.

    Don't talk about an over-population which simply isn't there. You have been listening to those BNP fools too much.

    Demand is kept artifically high in order to protect the wealthy. I can take you to 7 properties in South West London (very nice parts) which are currently lying vacant. One property is a block of maisonettes which could house over 30 small families - 1/2 a mile from the Wimbledon Tennis ground.

    Overpopulation cobblers.

  • Comment number 73.

    #57 quicksesh

    ...I would go further as to say we let them all move to Switzerland and then Europe breaks with history and invades - takes back all the wealth from the pitiful and weak nation which will have plenty of money but no army.

  • Comment number 74.

    62 - I think you over-estimate how much even the big players have control over the market (speculators don't always make money) - yes, speculation can affect future prices of commodities (see recent oil spike) but then they don't have a complete control (the subdued oil price is less down to speculation than lack of global demand - if it were completely controlable by your "wealthy friends" OPEC wouldn't have had such a kicking when oil shot back down)

    And again remember - someone writes the futures contract and someone buys it - these are often both big players - its a contract, when someone wins/someone loses

    Finally - futures are also used for business now (and done so unsuccessfully) - they are used to fix price in a volitile market (commodity futures or forex futures) and allow a company to operate with a certain degree of price fluctuation so the pricing of products doesn't become a lottery every time you go to purchase something in a shop

  • Comment number 75.

    #60 islider

    I can live with differing opinions - however not when the opposite opinion defies logic.

    "However it is somewhat flawed, in that Hedge Funds do not directly compete with Banks, their trading models are rather more complimentary."

    How? I am looking at a portfolio of a pension fund as we speak, there is a rather large holding in a hedge fund and a somewhat smaller holding across the financial sector (specifically banks) in Equities and corporate bonds.

    The return from the hedge fund was much better over the last 5 years - which is why the holding has increased. Meanwhile the financial sector spread has been declining over the last 5 years in proportion.

    You may see a difference between hedge funds and banks (because banks supply the credit for hadge funds) - but the people that matter (the fund managers) simply see them all as investments - with either a good return or not.

    The banks had to increase their dividend and you do that by increasing your profits - added to this mix was the competition between banks. As soon as one flinches the rest are forced to follow.

    If you still stand by what you say - could you explain what you mean by complimentary?

  • Comment number 76.

    Six of one, half dozen of other ??
    People/investors/banks/governments don't like being told they are in the wrong, and this is what hedge funds sometimes tend to do.

  • Comment number 77.

    hehehe looks like the good old days are back again - the recession that never went away has officially 'returned' according to the G8 and the moderating is delayed

    as for Boris; he is a tool for other interests but it's interesting to see that he has broken cover to cry wolf about this

    my view is that both NewLabour and Tory's know that they have irretrievably hitched their wagons to the City's interests, in terms of tax revenue and personal careers before and after stints in 'office'

    pragmatically, the UK's best chance for climbing out of the terrible hole it is in would be for the City of London to quickly regain and even increase its dominant position as the hub of the global Ponzi schemes associated with hedgies, CDOs etc

    let's face it, the UK's future is not in manufacturing is it?

    today's UK economy has more in common with the surrealism of Bunuel than the heavy engineering and design brilliance of Brunel

    with the US and EU attempting increased regulation, there is a big opportunity for the UK to seize the low ground of reckless capitalism

    question is, what to do with the other 99% of the population whilst those associated with City financial work return to 'business as usual' and watch the money roll in once again?

  • Comment number 78.

    The G20 working group recommendation 10 identified that private pools of capital including hedge funds can be a source of systemic risk owing to their combined size in the market,their use of leverage and maturities mismatches and their connectedness with other parts of the financial system. They or their managers would need to register with national authorities and disclose the risks they could pose. UK signed up to implement this within 2 years, didnt they? Were the G20 ga ga to make this recommendation?

    What's wrong Robert. At the first whiff that they threaten to throw their toys out of the pram and take their business elsewhere are you suggesting we cow-tow? More backbone please, old chap.

  • Comment number 79.

    65,

    Good Post and I agree, I would like to add to this bit (given my limited knowledge)


    I believe this is where all the historic asset bubbles start. It's all about the perception of value - and when the perception dissipates.......well we're seeing the effect of that right now.



    value - For me this is the key.

    Once upon a time there was a gold standard, there was x amount of gold. The central bank divided up the gold and printed x amount of money - Thus the value of each created money unit was known.

    After the gold standard was abolished (as in my view, again using my limited understanding), the capitalist realised that growth was being curtailed. Enter the Fiat currency model, with a bit of printing we can expand the supply (and with a slight of hand the value of your earnings drops) or we can decrease the money in supply. The problem with this part is that as people earn more money at the beginning of the cycle (they get conned into taking bigger mortgages etc) however, when it comes to the time of reducing the money supply in the economic cycle otherwise known as the great rip off the economy is usually in decline and hence most folk have already been ripped off. As unemployment ensues, the banks mop up the rest.

    A great Ponzi indeed, my advice to my children is simple. Never borrow money, NOT even for a house.

  • Comment number 80.

    69 - very well said

    I especially like the comment: "What is it we want for our future? Is it achievable? How do we know its achievable? Whats our evidence? Are we prepared for the costs and consequences of this new future?"

    Probably about as important a question as we can ask!

  • Comment number 81.

    61. stevejedwards

    All you seem to be demonstrating is how hedge funds really don't understand risk.
    They are undervaluing it in the hope that there won't be a major catastrophe - in order to win business.

    If insurance companies (who are the experts in the field) are looking to raise the cost of re-insurance - then don't you think there's a good reason for it?

    If a man tries to seel you a car at half the book price - don't you get suspicious?

  • Comment number 82.

    #67 rbs_temp

    "Better for the four average-value employees, certainly, but unlikely to be better for the company if none of those four employees can do what the one well-paid employee could have done."

    You're falling for that classic lie - the more I get paid - the better I am at my job.
    Having worked at the top I know this is wholly untrue.

    Sure - if you bring me a hedge fund manager who has 8 arms, 4 brains and 8 legs then I'll agree with you.

    Are you proposing that the 'fantastically clever brains of finance' are cleverer than the rest of us?

    Call me old fashioned but my builder would have spotted that CDO fraud a mile away - and yet the 'greatest minds of our time' failed to spot it.

    Don't believe the press you read in the city, it's all self congratulatory waffle. There is very little intelligence up here in the City - but a hell of a lot of dumb sheep.

  • Comment number 83.

    72 - at what point did I ever say that overpopulation had anything to do with immigration? (which I assume was your BNP point)

    So you talk about the importance of making things, farming the land etc and yet don't see a problem with 8 million people living within 20 miles of each other (London) - prices went up there because of demand on "desireable" living space - yes there are vacant properties but if you want the more sustainable country you seem to then you have to deal with the population issues - we have too many people to support on this small island - again not an issue with immigration but just too many people for a small bit of rock. Therefore consumption and useage of raw materials is too high - hence an unsustainable cost/ability to survive

  • Comment number 84.

    Watching a 30 minute java presentation on "how money works" does not mean that whatever you say is right. Flicking through wikipedia for a tidbit of information without placing it in context, then twisting it suit your own predetermined stand point is laughable.

    Reading about half of the comments on Peston's blog is, frankly, cringeworthy. As to the other half; thanks for actually enlightening.

    Moderators; can you not do something about the few consistent posters who just reiterate the same point ad nauseum ? It adds nothing to blog.

    And the answer is "yes". To say otherwise is to ignore the fact that when a business is making money, by default it must be needed. Can't think of many profitable companies that aren't doing so because their service/product isn't required or desired.

  • Comment number 85.

    71 writingsonthewall
    A passionate, yet wholly embarrassing answer.
    My reference was to the Financial Services Sector, not Hedge Funds, as per the original post I was responding to. So the question of Hedge Fund tax contributions have been spuriously added by your good self.
    Is still stands that without London the UK would be broke.
    Wealth doesn't migrate to London, Labour may do.
    As for:
    'Well my friend, do you think buildings are built by money? The last time I looked 'money houses' blow away in the wind too easily. Bricks, mortar and LABOUR build hospitals and schools'
    Please can I have some of your 'make beleive' hospitals and schools. Because last time I checked - Bricks, Mortar and Labour are not free, they have to paid for, as per my original post.
    As for the quality of your buildings, they may be a bit dark, cold and useless without the glass for the windows, electrical & plumbing fittings for heat & light and technology to support the medical & educational procedures.
    But it must be great in your world, can I have a free Range Rover while you're at it?

  • Comment number 86.

    68. At 2:51pm on 09 Jul 2009, islider55 wrote:

    You're splitting hairs now...

    Don't think Lux will have anything to worry about, as their in the EU. Hedge Funds leaving London to avoid the new EU regulation, won't pitch up there.

    --- I cannot disagree - but that's only been since this morning when they were moved from the 'black list' to the 'white list' - whatever that actually means.

    Don't recall the 'VW/Porsche sting' bringing down any countries, but feel free to enlighten me.

    -- No, not yet, but it illustrates the dangers of hedge funds - I saw £3 million wiped off a single pension fund (which had a heavy holding in a shorting hedge fund) in 3 hours on that day. The point being that the sheer movement of money the hedge funds manage are much, much bigger than the GDP of the countries in which they 'threaten' to go to.
    If you want a good example - check out Bermuda and the collapse of the Stanford fund.
    Want a more formed example - check out the failure of LTCM and imagine if the $3.625 Billion bailout had to be found by a small country Government (and remember, $3.625 Billion was about 20 years ago - it needs adjusting for inflation)

    the bottom line is that the threat to leave the country is just that - a threat. now you may be weak and give into threats, but I don't because I learnt once you give into the first.....the rest soon follow and they get more and more outrageous each time.

  • Comment number 87.

    71 one more thing, how do the Hedge Funds drive up wage inflation in the Public Sector?
    How is my local council competing with Hedge funds for staff? Different tasks Different skillsets.
    Public Sector FSPs costs have more to do with:
    Longer life expectancy equals more liability
    Very large numbers of Police, Fire Service, Council Staff retiring early on full pension due to (dubious) health grounds.
    I have first hand experience of this. But I guess this doesn't happen in your world???

  • Comment number 88.

    61. At 2:23pm on 09 Jul 2009, stevejedwards wrote:

    "Had they not put capital in, global reinsurance capacity would have been much tighter which would have driven up the price that insurers pay to protect themselves against quake and storm. Those price rises would then have been passed on to the consumer."


    Great, but really so what?

    People really need to be a little less good v bad, cowboy v indian, cop v robber about all this.

    Hedge funds, like banks, like Government and like just about everything you care to mention are not 100% evil, nor 100% perfect.

    The issue is to regulate in order to control the processes within the financial industry in order to protect people from harm.

    THAT is the purpose of most legislation actually. The Drink Drive legislation ins't there because the Government wants to be party poopers, it's because people get killed and maimed by an irresponsible minority of selfish, undisciplined people.

    So the same is with hedge funds. Probably most of them are reasonably O.K., but we also know some have not been and have caused signficant harm to the financial health of others, including helping towards causing the downfall of the banks which in turn has caused a tremendous additional burden on U.K. taxpayers.

    So, in such circumstances, it is reasonable for the UK (and other) Government(s) to do something about it.

    The fact is that whatever they do won't be against the hedge funds themselves directly, but will much more likely be to make illegal certain types of transactions and investments, whoever you are.



  • Comment number 89.

    Re 66 Milliesgrumps.
    What an excellent post.
    I'm no expert, but you obviously know what you're talking about, and have a good idea of why the City is so disliked and has such an awful image.
    "feeding off the blood,sweat and tears of honest entrepreneurs"....exactly.
    "real value creation as opposed to the plastic balance sheet financial engineering"....exactly.
    My view is to "regulate them all back into reality".

  • Comment number 90.

    The Germans are celebrating......

    http://news.bbc.co.uk/1/hi/business/8142038.stm

  • Comment number 91.

    82 - Writingsonthewall

    Congratulations - you have just fixed the NHS funding issues.

    Get rid of those highly paid doctors that are taking all of the money - we can replace them with scouts who have first aid badges and pay them a lot less - after all you could probably have about 20 scouts for each doctor and by your reckoning that is ALWAYS a better way to operate - the classic lie

    Wow - how come I never saw that before? Probably because I have never worked at the top and stupidly believe that some people can on their own do a better job than three of four other people who aren't good at their job...what an idiot I am.

  • Comment number 92.

    67. At 2:49pm on 09 Jul 2009, rbs_temp wrote:

    "Better for whom?

    Better for the four average-value employees, certainly, but unlikely to be better for the company if none of those four employees can do what the one well-paid employee could have done."


    And what about better for the Country and society to have four people in employment, rather than just one?

    You really do love to perpetuate the myth of the fabulously capable and, therefore, rightly fabulously rewarded super human boss types, don't you?

    I'll say again that it is a reality that some of those bankers receiving FIVE STAR rewards are the bosses of organisations that deliver FIFTH RATE customer services. How can that be if these super humans are so wonderful and capable and skilled?

    Most of them are actually over-promoted mediocre managers with the 'gift of the gab' and just not worth the extra remuneration. When push comes to shove, or the doo doos hits the fan, some of them could not manage their way out of a brown paper bag.

    Yes, there are a few truly capable ones. (In fact, I can still even believe there are some 'honourable' members in parliament too). However, there are, sadly for customers and shareholders and other interested parties, still far too many who are blagging it.

    So, in my book, the value for the company probably lies with employing the four and letting the one walk. The lower paid ones may well be more amenable to re-training. The overpaid one will probably just think s/he knows it all.

  • Comment number 93.

    58. At 2:05pm on 09 Jul 2009, writingsonthewall


    The point is that we can only legislate within our national boundaries - though we can encourage others to do similarly.

    At the G20, there were various noises about reining the hedge funds in.

    Now a hedge fund may actually run from the Cayman Islands, but they really need people in the market places of the US, the UK, Europe and other markets.

    If those goverments do similarly, then hedge funds will be restricted in their abilities.

    But, the UK Government's responsibility is to restrict the activities of hedge funds and others which harm the economy, or cause harm to individuals and society generally.

    My view is that restrictions upon the funds will be in the form of making illegal certain types of transactions and dealings on the UK (or European) markets - much like they banned the short-selling of certain bank shares at the beginning of the crisis. So it won't really matter where they fund is really based and it's not the concern of the UK Government (or the European Government) if those funds continue to do 'naughties' in Asia, or wherever.

  • Comment number 94.

    #70 Horned_Devil

    With regard to your first paragraph - I don't see any need for hedge funds at all. The issue is around lack of transparency and total lack of regulation. They are run to make rich men even richer (because you NEVER see a hedge fund set up by a poor man). Whilst I agree some hedge funds do seem to be doing 'good things' like donations to charity - everyone undertsands that their first priority is to make money - not to be liked, or be popular, or to make sure the economy is tickedy boo.

    Follwing your argument - it should be fine to have cowboy builders. They are not subject to the same regulations as ordinary builders - but they are cheaper and quicker - so they must be more efficient. The reality is that the lack of transparency means you can't tell who a cowboy builder is - and therefore get ripped off. It's no different for the hedge fund industry. They offer great returns, but are less than transparent about the risk they are taking to get those returns.

    I disagre with your sentiment in the second paragraph - the vast majority of investments are from pension funds. Working people (who those funds represent) would be appalled if they knew the risks that were being taken on their behalf. They do not reflect the sentiments of most investors. How many people on this blog know exactly what their pension is investing in?
    ....you think you do - well I have seen tricks which get around tight restrictions such as UCITS - so you might think your fund is well regulated, but I can assure you that's only for as long as it takes for someone to think up an instrument that circumvents it.

    Finally - hedge funds did not have a place before 1949 - so why are they so entrenched and neccessary now? This is the same argument for nuclear warheads - apparently they are essential for world peace - but the world has had many periods of peace before nuclear weapons were invented.

  • Comment number 95.

    75 I too have in depth knowledge of the Long Only and Hedge Fund areas of Fund Management.
    My explanation of complimentary was based on the Banks relationships with Hedge Funds. Your original post stated they competed for the same clients they do not.
    If you're now saying that Fund Managers as Hedge Fund Clients also invest in Bank shares that's a different thing altogether. The Fund Manager would be a part owner of the Bank via it's shareholding and a client of the Hedge Fund, two different things being a part owner of a business and another being a client.
    Further to your point on the portfolio construction, this is called diversification of the portfolio. With asset allocation across different asset classes, a mix of FI, Equities, Derivatives & Cash would be expected through individual holdings or holdings in a fund.
    The flaw is your comparison of the change in the Hedge fund holding in comparison to the Financial stocks due to performance over the term.
    Hedge Funds do not only invest in financial stocks, and should not be classified in a Financial Sector. They should be classified according to the underlying asset classes they invest in e.g. Small Cap UK Stocks. You can't compare apples and pears, and with your comparison blown out of the water, there goes your Logic with it.
    Thank You And Goodnight

  • Comment number 96.

    It's frightening how opinionated some people can be when they don't know the first thing about hedge funds!

    1. Hedge fund managers in the UK have been regulated to quite a large degree for years. It doesn't matter if the funds they manage are in the Cayman Islands or the UK, as it is the manager that does everything that needs to be regulated, and the manager is never in the Cayman Islands. The reason that hedge funds haven't been subject to leverage limits, short selling limits and so on is that policymakers have allowed them to be exempt, not because they avoid attempts to regulate them by being in the Cayman Islands. The government can regulate this wherever the funds are set up.

    2. Hedge funds escape tax not because they are in the Cayman Islands and avoiding government attempts to tax them, but because the government has specifically put in place exemptions allowing the funds to avoid UK tax (which they would otherwise pay because all their profits are generated by UK managers). This is because hedge fund managers in the UK already pay the tax on all the fees they get in the UK, and hedge fund investors in the UK already pay tax on the returns they get from their hedge fund investments. So Boris is not wrong in saying that a lot of tax is paid in the UK because of hedge funds. If a hedge fund manager is in Monaco and doesn't pay UK tax, that is because the UK government has no business taxing people living in Monaco - which is obvious when you think about it.

    3. Robert begins with what looks like it might be an interesting article about the EU Directive, but then goes off into some GSCE-grade "list the good and bad points" discussion on hedge funds. A lot of the criticisms are valid, but what this level of analysis doesn't pick up is that most of the things that are listed as criticisms of hedge funds apply to only a small portion of hedge funds, and also apply to a lot of businesses that aren't hedge funds. It's like suggesting that, because smoking is bad, Liverpool should be tipped into the sea because some people in Hull smoke. What about non-smoking Liverpudlians? What about smokers elsewhere? The best plan is to tackle smoking, not Liverpool. If that is done, hedge funds can't object.

  • Comment number 97.

    74. At 3:08pm on 09 Jul 2009, Horned_Devil wrote:

    62 - I think you over-estimate how much even the big players have control over the market (speculators don't always make money) - yes, speculation can affect future prices of commodities (see recent oil spike) but then they don't have a complete control (the subdued oil price is less down to speculation than lack of global demand - if it were completely controlable by your "wealthy friends" OPEC wouldn't have had such a kicking when oil shot back down)

    -- Don't confuse a battle between wealthy capitalists and a defeat of one over the other as a sign of parity in the derivatives market. OPEC set the price of Oil (by differing output / supply), the speculators speculate on what that price might be. Just because sometimes they loose some of your money - doesn't mean they don't know exactly what they're doing. Who really lost out when the Oil price spiked? - oh yes, it was the consumer, through higher energy bills and more to pay at the pump. Any speculators that lose money - didn't loose their own - they simply cannot loose.

    And again remember - someone writes the futures contract and someone buys it - these are often both big players - its a contract, when someone wins/someone loses

    ---oh yes - that's certainly true - now work out who has been on the 'wrong side' for all this time? Are you making a fortune from oil price fluctuation? - or are you just watching petrol prices go up and up and up?

    Finally - futures are also used for business now (and done so unsuccessfully) - they are used to fix price in a volitile market (commodity futures or forex futures) and allow a company to operate with a certain degree of price fluctuation so the pricing of products doesn't become a lottery every time you go to purchase something in a shop

    -- I agree to a point, the original use of futures to insure against unknown events is fine. However when insurance is given on man-made events the potential for illicit money making is much increased because those events are much more controllable.

    Have you never wondered why Lehmans was allowed to go bust and Merril Lynch wasn't? Do you think it had anything to do with who was covering the default insurance on the two banks in question?

    if you really think the best way for the world to operate is for the majority of wealth to be in the hands of a 'trusted few' - then we have no argument. I on the other hand do not see this as productive for the majority.

  • Comment number 98.

    My feeling is, that if Boris says they should be saved, kill them as quick as you can. Never has been right on much has dear Boris.

  • Comment number 99.

    86. At 4:00pm on 09 Jul 2009, writingsonthewall wrote:

    Erm... would that be the same Stanford that was actually based in Antigua?

    Anyway, back on point, the EU has been gunning for Hedge Funds for years and years.
    They're just not letting the fact that the hedgies actually did very, very little to contibute to the global downturn get them down and are using the current climate of voter discontent to go after an industry they've wanted under the thumb for many years.
    Yes hedge funds did contribute to the problems we're in now but they're very far down the list, after poltiicians, bankers, mortggage consultants, property speculators, ratings agencies etc.

    Somebody mentioned above that banks were enticed to act like hedge funds because they wanted to generate similar returns - is that really the fault of the hedge fund or is that the fault of the bank for having such a misaligned risk appetite or the politicians for allowing banks to act like their gambling counterparts?

    With regards Private Equity - well I dont see the issue. There are very few PE firms that do the large debt-laden deals - most work in the mid-cap world and invest responsibly and get remunerated over the long-term, typically 10 years on a cash-generated basis.
    As it stands now a large proportion of UK-based PE firms invest in the emerging markets and so dont need to be based in London anyway - they do it because London is a great place to do business. But it could just as easily be the Caribbean or somewhere the sun shines.

    Again somebody mentioned above that he knows a PE house where the funds are registered in the Caribbean and the owners live in Monaco - sorry sunchine but I dont really think they're the funds that are being targetted here.

    For the most part both hedge funds and PE play a big role in the economy - anyone who has a pension will have at least 5% of their pension invested in private equity and probably slightly more in hedge funds... so chase them away and make life hard for them - it is your money afterall.

  • Comment number 100.

    #79 JavaMan

    Now you're showing off to the rest of the class.

    I completely agree the removal of the Gold standard was the killer in manilla for the sense that surrounded currency and totally skewed everyone's sense of value (at least Gold was something you could touch and feel).

    However, I'm going for the extra bonus points by stating that the removal of the Gold standard was "completely necessary"........

    .....in order to prevent the expected de-valuation at the time and to re-inflate the bubble so everything would be OK.

    - so the book is on what will they conjour up this time? I'm thinking a world currency, sounds far fetched, but they are going to need to find something as dramatic as ditching the Gold standard - or otherwise go through a VERY long period of devaluation.

 

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