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Hedge funds as heroes

Robert Peston | 08:32 UK time, Wednesday, 17 March 2010

In the autumn of 2008, during the worst global banking crisis since the 1930s, I was interviewed by French television and asked to explain the malevolent role of hedge funds in causing the mess we were in.

When I said that hedge funds were really not at the heart of the matter, the interviewer was shocked and disappointed. She was in London on a mission to tell the truth to her viewers about the malignancy of hedge funds, and her script did not allow for a different version of events.

Some would say that the European Union's determination to drive through a directive regulating hedge funds and private equity is a manifestation of the same blinkered vision.

It's not that a bit of additional regulation might not be useful. More transparency about their activities, formal limits on the amount of debt or leverage they can take on, these could be sensible safety precautions, to limit their potential to wreak damage to the financial and economic system.

But there is a strong argument that proponents of the new directive are missing the big and important points by a mile. Which means that the passionate and obsessive determination of some EU members to see the directive enacted can be seen as a bit silly (at best) - especially at a time when the real flaw in the financial system, the structure and regulation of banks, is a long way from being fixed.

There are two important points.

First, the actual harm that hedge funds and private equity may have wreaked in the creation and course of the credit crunch could probably be much better tackled not by regulating them directly, but by new restrictions on the banks that service them and take credit from them, and on the financial markets where they trade.

There are five kinds of harm that hedge funds and private equity may have caused, all of which are fixable without a directive that imposes new direct constraints on hedge funds and private equity:

1) Some financial institutions, such as Bear Stearns and Lehman Brothers, became dangerously dependent on short term credit provided by hedge funds. But that's fixable by imposing tough new requirements on such investment banks to raise much more longer-term finance that can't be withdrawn on a whim.

2) Many believe that hedge funds have destabilised banks such as HBOS and even entire economies, such as Greece, disproportionately to the fundamental weakness of such banks and economies, by their ruthless financial speculation that such banks and economies were heading for the knackers. Now, to be clear, that hypothesis is by no means proven. Some would say that in such cases hedge funds are the public-spirited early warning system (please don't shoot your computer). But if you think that it's wrong to allow the mafia to take out an insurance policy on your house that delivers the mob a profit when your house burns down, which is how some would see naked CDS shorts on bank debt or government bonds, then ban those insurance policies, prohibit naked CDS shorts. But that's product regulation, not regulation of institutions such as hedge funds.

3) Hedge funds have provided a market for some of the newfangled financial products, such as CDO squareds and cubeds, that decimated the balance sheets of banks. But if you don't like the toxic new products, regulate their development or the extent to which banks can load up their balance sheets with them.

4) Banks have suffered big losses on their loans to businesses acquired by private equity firms. But that is eminently sortable by constraining banks' ability to lend to over-indebted companies and institutions.

5) Finally, the massive rewards earned by the partners in some hedge funds and private equity firms helped to encourage the spread of a pernicious short-term bonus culture in banks. But let's be clear about this. First of all most hedge fund and private-equity partners are at least putting some of their own money at risk (although some would say nowhere near enough), which almost never happens in banks. More germanely, hedge funds and private equity surely can't be held accountable for the abuse of their remuneration system by other institutions.

And then there's the humungous final point, which is the one that the proponents of the EU directive in the French and German governments simply don't wish to acknowledge. Which is that there is a powerful argument - if you believe in capitalism - that hedge funds are in one overwhelmingly important respect a model for how the banking system should be reformed, and absolutely not a financial tumour that needs cutting out.

The fact is that hundreds of hedge funds went bust over the past couple of years. And there wasn't a single one, for all the billions of dollars of investors' money they controlled, which needed to be bailed out by taxpayers.

Why was that?

Well it was probably not because of brilliant regulation by the likes of the Financial Services Authority.

The much more compelling explanation is that they were subject to the direct engaged oversight of their investors and creditors, which limited hedge funds' ability to take unaffordable risks. It never occurred to those providing finance to hedge funds and private equity firms that the state might provide them with a safety net. So those creditors and investors made sure that those hedge funds and private equity firms only speculated what they could afford to lose.

This is the important big contrast with banks, where investors and creditors knew that if everything went wrong, taxpayers would be there to pick up the bill. Which meant that those investors and creditors had less of an incentive to prevent banks from betting not only the farm but the entire landscape.

On that view, we would want banks to become more like hedge funds, not regulate hedge funds out of existence. Or to be more precise, the investment banking bits of the likes of Barclays, Deutsche Bank or BNP Paribas should perhaps be hived off and shrunk, so that there would be no reason for taxpayers to bail any of them out if they ran into difficulties.

Some would therefore argue that if the French and German governments really want to make the financial system safe, they would start by dismantling their enormous complex universal banks. The consolidating power of these sprawling banking conglomerates may pose much more of a threat to future financial stability than hedge funds.

Comments

Page 1 of 2

  • Comment number 1.

    There are obviously NO CONSPIRACIES involved but are we heading towards a single world currency and financial system regardless. Money moves through different jusridictions like lightening

  • Comment number 2.

    RP - I don't understand two things on what you've said here.

    1. I'm a fan of hedge funds, but you don't really make their case very well - the obvious question you don't answer seems to be 'why bother to regulate a myriad of other things when you could solve all the problems with the single action of targeting hedge funds?' If these things are worth saving, then explain the positive things they do (although you slightly allude to it by calling them early warning systems.)

    2. The tenet of this piece seems to run contrary to the theme of your book, in which you repeatedly lambaste hedge funds for basically stealing from the pension funds of 'ordinary people' and give them a bad press. Are you merely swaying with the prevailing wind?

  • Comment number 3.

    It is refreshing (and enlightening) to have Robert cut to the core of the issue. Being directly accountable for ones actions is a telling way of ensuring acceptable risk. Would Governments borrowing pass the same test as owners/lenders to hedge funds?
    Do the traders in 'universal banks' feel the same consequences as those with 'skin in the game'?
    Did the politicians feeling the benefit of financial growth during the last 10 years feel compleled to turn the gas down on the system that was funding their political programs - I think not.
    Seperate actions (i.e.'authority' - e.g.legislation, investment, borrowing) from responsibility (ie. the direct risk of failure) and you are always going to have trouble.....

  • Comment number 4.

    ...and what about the service being provided to the markets by hedge funds, in particular by their short selling, which allows them to prick the bubbles of overvaluation.

    They are able to say to the markets (as Hugh Hendry said on Newsnight last week) "the emperor has no clothes".

  • Comment number 5.

    I think you encapsulate well that the problem is down to players in the financial sector reaching a size where a bailout becomes necessary. If hedge funds can go belly up, and investors (gamblers) swallow down their losses, so be it. Parasites that live and die without taking their hosts down with them are tolerable pests.

  • Comment number 6.

    > the investment banking bits of the likes of Barclays, Deutsche Bank or
    > BNP Paribas should perhaps be hived off and shrunk, so that there would
    > be no reason for taxpayers to bail any of them out if they ran into
    > difficulties.

    Too right that should happen... I just can't understand the delay. Then
    slap a Tobin tax on the lot of them, and see how they get on. It's
    a no-brainer - who's slowing things up?


  • Comment number 7.

    Hedge funds only exist as vehicles for the very rich to become mega rich.

    For the wider population they are socially useless.

    China seems to be be doing very well wihtout such parasitic entities in their midst.

    I heard on the Radio 4's Today programme this morning that in the 70's the average FTSE 100 CEO's salary was approximately 10 times that of their average workers salary. Today that figure is a 100 times.

  • Comment number 8.

    Good analysis, Robert, but there are three questions that still needs to be answered.

    One is why the French government and press feel the need to blame the Hedge Funds rather than the banks, regulators and governments?


    The second is why the Hedge Funds were so well run that they did not presume that they would be bailed out by the tax payer?


    The third is why the banks did not see the need to run themselves with the fiscal prudence of the hedge funds?

    In addition to that the perception of the French and German politicians together with their interpretation of the perception of their own electorates, will show the reason why rearranging the banks will not be done, and there will be another bust in a few years.



  • Comment number 9.

    Unlimited personal liability for hedge fund managers.

    Simples.

    On second thoughts, how about unlimited personal liability for bank boards? Think of the political capital in that idea...

  • Comment number 10.

    Will the boy-girls be working off the books this year again
    Are any punters buying up large cheap properties portfolio's

  • Comment number 11.

    Hedge funds create nothing new and will therefore contribute little if anything at all to the rebalancing of the economy.

    Tax them out of existence. We don't need them and the damage they cause is counter to our national interest.

  • Comment number 12.

    RP, not sure how your blog today will be received, but genuine respect for writting the article your way.

    The points which crossed my mind in reading were:

    "Banks have suffered big losses on their loans to businesses acquired by private equity firms" - I would imagine a lot of businesses would say that they have paid an arm and a leg to the private equity firms and banks due to their need for finance

    "The much more compelling explanation is that they were subject to the direct engaged oversight of their investors and creditors, which limited hedge funds' ability to take unaffordable risks"

    I'm not too sold on this arguement there no logic to the investors to limit the amount of debt if they go bust.

    I like the arguement more that there that the fact there are hundreds of Hedge Funds reduced the damage of individual one's going bust, but i suspect Banks structures are so complex now it would take literally years to unravel them, the reality is even if there were a large number of smaller investment banks "they will still run with the hurd" become embroiled in cross bank agreement and look to manipulate the system, the culture of banks must change

    Strong, independent and risk adverse regulation is a desperate requirement for banks and hedge funds. Regulating one and not the other will not work. (regulating both also may not work!, but it needs a try)

  • Comment number 13.

    7. DebtJuggler wrote:

    "I heard on the Radio 4's Today programme this morning that in the 70's the average FTSE 100 CEO's salary was approximately 10 times that of their average workers salary. Today that figure is a 100 times."

    Where annual salary increases are based on percentages (as they are), rather than absolutes or fixed ratios, this is inevitable. In 30 year's time the figure will be a 1000 times. Except it won't, because in 30 year's time the already rotten-to-the core system supporting this absurdity will be long gone.

  • Comment number 14.

    The problem caused by the credit crunch was not that the taxpayer had to bail out the banks, this was not necessary or even desirable. The problem was that money was lent in the wholesale money market, and the mortgage market, without properly assessing the risk. There was no reason why the taxpayer should have been required take over these debts

    After protecting the first 50 GBP of personal deposits, the banks should have been allowed to fail, wiping out most of their debts. They could then have been restarted by the administrator without the burden of debts other than modest personal deposits.

    Investors needed to be reminded that higher interest rates on deposits usually imply higher risk, and if maximum security is required, they should stick to investments such as gilts and National Savings specifically backed by the state. It unfair that those who did so, now have to pay as taxpayers to cover the losses of those who took risks in order to gamble on higher gains.

  • Comment number 15.

    It is the banks that need regulation, not the hedge funds. The currency belongs to the people, not the banks. Our business.

    Let people do what they like with their own money ie lottery, horses, pools, hedge funds whatever. Their business.

  • Comment number 16.

    So hedge funds are more like on line gambling? If you can afford to lose you are fine, if you have a gambling problem, don't gamble?

    I see now, all is clearer in my mind. So the pensions funds take so much care of our cash they gamble with it?

    And I thought all the money lark was taken seriously.

  • Comment number 17.

    How about some snappy new legislation that stops banks from bolting dodgy investment bank activities onto their retail balance sheets..... let's call it, errrr, I dunno....... how about Glass-Steagall? There's a thought...

  • Comment number 18.


    If hedge funds that take risks and go bust are not bailed out then they cannot be blamed for risks taken by, or involved in the bailout of, the banks.

    #6 I agree that the obvious solution to prevent this problem recurring is to separate off the bank's t seems to me that the delay is because the banks have successfully argued that if they were separated then the supposedly profitable investment bits would go bust (like some hedge funds)and they need the retail bits to go on "repairing their balance sheets" by ripping off their customers.

    The second reason the European's don't like hedge funds is that they can bet against countries (eg George Soros' famous bet against the pound - or the current pressure on Greece). I'm not so sure that this is a good thing. I see the argument that these activities do not create the problems and may speed up their resolution. But this is a rationale which looks at the World solely through the eyes of the money men. On the other hand, if we look at what happens in the real world,it could also be true that the markets can precipitate a crisis that might otherwise have been avoided.

    In which case, regulation of these speculative activities would, in my view, be justified.

  • Comment number 19.

    Hedge funds, heroes? You're having a giraffe! I don't deny their right to exist but it's unacceptable for them to be playing with other people's money in their rush to gamble big paper profits and eye-watering bonuses.

    Splitting up the mega banks is an obvious first step to divorce excessive risk from the likes of individual investments and pensions and the banks are quite rightly being limited on how they leverage their balance sheets. This needs to go further, removing the excessive bonus culture from 'safe' investments and ensuring those who gamble can also lose everything, especially everything of their own.

  • Comment number 20.

    Gordon Smith (3) wrote "Being directly accountable for ones actions is a telling way of ensuring acceptable risk." He's absolutely right, but I don't think this applies to hedge fund managers. Even if their funds have gone bust, the worst they suffer is never working in the industry again. However they've pocketed bundles in the meantime and as I look around, I don't see many of them on the breadline. Therefore I don't think they're that different from bankers who take a punt with others' money.

    As for Kudospeter (12), I think he puts his finger on the key issue - a single, or indeed 50, hedge funds do not pose a systemic risk if they go under, and I agree with your penultimate paragraph which seems to say pretty much the same thing.

  • Comment number 21.

    #13. the_fatcat

    "Where annual salary increases are based on percentages (as they are), rather than absolutes or fixed ratios, this is inevitable. In 30 year's time the figure will be a 1000 times. Except it won't, because in 30 year's time the already rotten-to-the core system supporting this absurdity will be long gone. "

    Wrong!

    If in 1970 a CEO earned 100 quid and a worker 10 quid then if they both have received a total 100% pay rise in the last 40 years then the CEO will now be earning 200 quid and the worker 20 quid. So whilst in absolute terms difference is now 180 and not 90 quid, the CEO is still earning "only" 10 times the worker. Thus in order for the CEO to be earning 100 times the worker now, his percentage pay rises over the last 40 years must have been significantly higher than that of the average worker.

    Which begs the question: Is the average CEO in 2010 so much more produvtive than in 1970? Or alternatively: is the average worker in 2010 so much LESS productive than in 1970? Hardly.

  • Comment number 22.

    No 13. At 09:44am on 17 Mar 2010, the_fatcat wrote:
    7. DebtJuggler wrote:

    "I heard on the Radio 4's Today programme this morning that in the 70's the average FTSE 100 CEO's salary was approximately 10 times that of their average workers salary. Today that figure is a 100 times."

    Where annual salary increases are based on percentages (as they are), rather than absolutes or fixed ratios, this is inevitable. In 30 year's time the figure will be a 1000 times. Except it won't, because in 30 year's time the already rotten-to-the core system supporting this absurdity will be long gone

    Sorry the fatcat, but in this instance you are incorrect on one point, if percentage increases were the same for all, then the ratio's would remain the same.
    (i'm sure people know i'm a boring old accountant). The problem with executives pay is that they are set by non execs. All they do is look at what is the average increase in pay for the peer group, then decide their boy is a little better than average so deserves a greater increase and you have an ever increasing spiral.

    exec pay rising from 10 times multiple to 100 is staggering and imo fuels the short term risk culture. getting the top job, or anything close means you will earn more than double in one year than the average joe has to live on for a lifetime

  • Comment number 23.

    Nah. All wrong. Quick rewind. To the top.
    Robert was interviewed by French TV.

    Was a fee involved?
    Did his employer get it?
    We need a parliamentary commission set up to investigate.

  • Comment number 24.

    Those wonderful hedge funds directing capital to the most productive parts of the economy to maximise growth & wealth for the population so we can all live a comfortable, happy life.

    Hold on a minute, reality for ordinary people doesn't match this description.

    Is in not more like, cut wages, make workers work longer & harder, don't let them retire until they & about to drop dead, ensure there's plenty of unemployment & immigrants being paid peanuts to discipline the workers & make them grateful they have a job - all so those with the capital to invest can get the maximum return.

    Hedge funds & the rest of the capitalist system needs to be wiped out!

  • Comment number 25.

    Robert,
    Although I agree with most of your arguments I think we should do more to root out this plague that has become the pure speculation. Hedge funds are not the only players in this game, but they are at the forefront of it.

    If we fix this, bringing speculation under some sort of limiting rules (start by defining what the most damaging speculation is, like speculating in crude oil for example), most of our current big problems, including volatility on stock market and bonuses will go away as a side effect.

  • Comment number 26.

    I feel that there are other forces at play here Robert. Politicians in Europe have been exposed as their Euro project has been shown to have flaws accordingly they need someone to blame as a scapegoat.This is an example of notayesmanseconomics web blog's theme of moral hazard and also his theme of politicians grandstanding.For example a plan with no details like the EU came up with yesterday or the failure of the Euro to have any real emergency planning and options.
    So it is easy to blame hedge funds particularly when they expose politicians errors! No wonder they want them closed down.
    Whilst I am not a lover of all aspects of hedge funds they were not responsible for the problems in banks it was the banks directors and they were not responsible for Greece's fiscal problems her politicians were..

  • Comment number 27.

    #21. Robin

    Sorry - yes, you're right, of course.

  • Comment number 28.

    Duh Robert. They need someone to blame. And then to take the rap. And then to be punished. Hedge funds fit the bill. Case Closed. Sentence passed. The guilty? Well they sleep soundly (at least one at No. 10)

  • Comment number 29.

    # 22. At 11:13am on 17 Mar 2010, Kudospeter wrote:

    > exec pay rising from 10 times multiple to 100 is staggering and imo fuels
    > the short term risk culture. getting the top job, or anything close means
    > you will earn more than double in one year than the average joe has to live
    > on for a lifetime

    It means normal taxpayers have to carry these lame ducks for the rest
    of thier lives. Can't we have a special, weak currency for bosses, and
    a proper one for good people?

  • Comment number 30.

    Just going back to financial regulation, if the FSA can't adequately monitor a Credit Union with only 20,000 customers and assets of only £30 million, its no surprise the rest of the banking sector got away with what they did. Leeds City Credit Union needed an emergency Loan of £2 million from Leeds City Council and as much from the Dept for Work and Pensions and is still in serious financial difficulty. It's ex chief exec has been arrested on fraud charges and was recently declared banrupt!

  • Comment number 31.

    "The fact is that hundreds of hedge funds went bust over the past couple of years. And there wasn't a single one, for all the billions of dollars of investors' money they controlled, which needed to be bailed out by taxpayers".

    OK so this has been true recently Robert, but go back a bit further and in the space of four letters it's clear that hedge fund collapses HAVE had systemic consequences, meaning....

    ...LTCM

    Maybe it wasn't taxpayers money that was used then (.... was it effectively a 'haircut' from the investment banks, banks etc that were the counterparties that bailed them out?), but it certainly had systemic consequences.

    I agree that:
    - the big conglomerate banks and the so-called 'investment banks' are the absolute key to the problem and need to be split up and downsized, so that I personally, with my savings account, my day-to-day use of money/credit cards/BACS money transfer etc can be completely disconnected from any casino activity whatsoever from whom I gain no benefit, only downside risk.
    - financial instruments need a complete overhaul in terms of what contracts are valid under law. I would have thought even for existing things like CDOs squared and cubed, any purchaser could have assembled a substantial case against a supplier under normal contract law for invalidity, saying the contract was too complex and opaque.

    I also think that:
    - we need a transaction tax, to help reduce volatility, get rid of this ridiculous high frequency trading business (which is in effect a tax itself on those who don't run the big computer dealing systems), and help the government assemble a fund to assist in the next crisis involving some other part of the financial system that we can't predict at the moment (.... or via a Robin Hood tax, contribute to parts of the world where this whole financial shenanigans is the least of worries). A little friction in the system will in the end stop the engine over-revving and blowing up.
    - gearing levels are important and need to be controlled, but this should preferably be done by restricting the provider of the debt, not the borrower. (i.e. I'd get angry if I understood that my bank with my secure money on deposit was lending it to a hedge fund, another bank or anyone, even a Giant Vampire Squid, geared up to crazy levels). But if this cannot be done effectively then, clearly financial regulations would need to be in place.
    - we need much more information in the public domain. Absolutely every financial institution needs be compelled to get more details of its operations out there for all to see. Once again, in the battle between the two philosophies of regulation, either "black box" - being "leave it to us all-knowing regulators and don't worry your pretty little heads about it" - or "open box" - being "look here market, see. With these assets and liabilities, how much risk do you think this institution is exposed to?", a fairer society absolutely will emerge from emphasising the latter.

    However, having said all this it is very important that an ordinary person who happens to have a lot of money of his or her own (... not borrowed etc, so effectively 'equity' money) can use it in whatever way they like - even if this means betting it on the Greek government defaulting, or against Sterling as a currency, or in potential target take-over companies.

    So I say, as long as hedge funds are limited in gearing and size to ensure that individually they acquire no systemic importance, and they declare more info on their activities/assets/liabilities into the public domain, good on them to continue helping to allocate capital effectively around the system.

  • Comment number 32.

    I think everyone here is well versed in financial conspiracy theories but we would really like inside knowledge on the financial conspiracy practices. It can't be that difficult to nail down exactly what these hedge funds are / were investing in before they move again into the next big project / scheme

  • Comment number 33.

    EU directive has absolutely nothing to do with economics and trying to prevent another credit crunch - the EU Commissions own report makes it clear that hedge funds were a very minor player in that fiasco.

    The EU directive is a political power grab, the French govt in particular (although there are a couple of others like Denmark) despise the concept of private equity and hedge funds as a principal and in the French case it is simply an exercise in trying to weaken the London financial centre - possibly for the sole reason that it is based in the UK not Paris.

    As a power play it is typical of the total corrupt nature of EU politics.

    Hedge funds are a total irrelevance to the credit crunch. Hedge funds did not destabilise Greece, the Greeks managed that all by themselves by massively overspending and then fiddling the books. Hedge funds did not destabilise HBoS again HBoS managed that all by themselves. All the activities of hedge funds do is highlight something that bank analysts should have picked up. If hedge funds go bust then there is no govt bailout - and if anyone quotes LTCM I will simply state that should never have been helped.

    The one thing I would like to see is more transparency in hedge fund dealings (centralised exchange for some type of hedging instruments maybe). That way the market has access to information on what they are doing

  • Comment number 34.

    4. At 09:11am on 17 Mar 2010, writingnotonthewall wrote:

    Get a life.

  • Comment number 35.

    Robert,

    Read about LTCM before you start backing the hedge funds. The only reason that story wasn't bigger was because the banks helped cover it all up (once they realised they had been foolish in investing heavily in such a closed fund)

    "Incompetent soldiers using weapons of mass destruction" - is a perfect summary of hedge funds.

    They may not have caused any damage so far - but once again you're following the media mantra that "it's all over bar the shouting" - but the truth is very different.

    Nothing has changed in the world of Sovereign defaults - and whilst many hedge funds will profit from defaults, many are going to go pop when they start coming due to their strategy of 'Country is better than corporation' - which is about to be tested.

    The rules were changed in 1998 when a hedge fund became 'too big to fail' now it's just a case of waiting for the next one.

    What hadge funds have done since then have moved into the 'mainstream' - i.e. being invested in by pension funds and other savings products - whilst maintaining their position outside of regulation.

    ...and does anyone think that's a good idea - I mean really?

  • Comment number 36.

    Banking again.

  • Comment number 37.

    "The fact is that hundreds of hedge funds went bust over the past couple of years. And there wasn't a single one, for all the billions of dollars of investors' money they controlled, which needed to be bailed out by taxpayers.

    "Why was that?

    "Well it was probably not because of brilliant regulation by the likes of the Financial Services Authority.

    "The much more compelling explanation is that they were subject to the direct engaged oversight of their investors and creditors, which limited hedge funds' ability to take unaffordable risks. It never occurred to those providing finance to hedge funds and private equity firms that the state might provide them with a safety net. So those creditors and investors made sure that those hedge funds and private equity firms only speculated what they could afford to lose."

    Errm, extremely strange logic here from the Hon P.

    (a) Loads of Hedge Funds failed anyway, as he says, despite his assertion that there was direct engagement and oversight from their investors and creditors.

    (b) Also - his implication is that it did occur to the banks that they would be bailed out in a crisis. Where does that idea come from? The bailing out scenario would never have even been envisaged whilst the problem was building.

    (c) The bail-outs occurred because - and only because - retail and business deposits were at risk with the banks, and the commercial and retail banking system was so intrinsically vital to the whole economy... not such a massive problem with hedge funds.

    #17 MogulMo is much more on the right track than Preston.

  • Comment number 38.

    "Banks have suffered big losses on their loans to businesses acquired by private equity firms. But that is eminently sortable by constraining banks' ability to lend to over-indebted companies and institutions."

    Your statement argues against the government bailout of banks.
    You fail to address any responsbility on the part of the banks to adequately have reserves to support loans. You also fail to provide any requirements for the banks when they gamble away despositors retirements without a responsbility to repopulate those losses or at a minimum provide the depositors with a risk assessment and allow the non-participation by those whose money is being placed at risk.
    The truth is that this was a colluion by the banks with the knowledge that the defults would be paid by the taxpayers and the real issue is the relationships between banks and government. If large banks manipulate the market there is no free market. If banks influence the regulatory process to the disadvantage of their customers than who represents the customers?

  • Comment number 39.

    "Some financial institutions, such as Bear Stearns and Lehman Brothers, became dangerously dependent on short term credit provided by hedge funds."

    Robert, I'm just wondering what kind of hedge funds are these? I know of no hedge funds that are a position to fund an investment bank. If you do, please let me know - I'd like to talk to them about their business model. As far as I know, hedge funds typically borrow from their prime brokers (investment banks) and post their assets as collateral against their borrowing.

  • Comment number 40.

    Finally a comment from Mr Peston that I agree with in the main. Hedge funds and indeed capital markets perform an important role, they ultimately are the arbiter of first resort. Many governments and people are maddened at the role hedge funds have allegedly performed in destabilising HBOS and Greece. The truth of both these cases is that neither of them were/are viable going concerns.

    Greece for example has been in dire need of major fiscal rectitude for many years. It wa bailed out in 83 and 84 by Germany bu then continued on the same track. By continuing to paper of the cracks bigger problems come out down the track.. something I think people would be all to well aware of these days post the property bubble (as that is where the ENTIRE credit crunch has it roots). Bond markets marking lower the price of their debt is perfectly understandable... If a Government expects me to lend them money then it is up to me to determine the price at which i will lend them; in the case of Greece >40bn Euros. Now of course hedge funds are not the only bond 'market vigilantes', this also applies to pension funds, banks, insurers and private individuals. This is a role that goverments these days are seemingly incamable of doing themselves. Just look at Calamity Brown and his spend, spend, spend just so I can win, win, win strategy. Even my 5 yr old son could see that's wrong.

    Hedge funds are high risk/high reward, therefore the people who lose money in failed ones know the risks.. the reason that it is a much more agreeable model, and just to clarify most if not all hedge fund managers have large proportions of their own personal wealth in their funds. There are lots of the "I could do that job easily" brigade who regularly comment on here. Just to point out you can easily set your own fund up, all you need to do is risk your own money, the rest you tell me is childs play. I'm sure you'll all be great at it and look forward to seeing you at the next ARK dinner... or perhaps not.

    Lastly I see mr Cartier again calling for his tobin taxes etc. He has still never pointed out exactly why investment banks need to be separated. Being a worker in a big american one I dearly wish they were as I would earn far more not having to subsidise my colleagues in the corporate or retail bank, who by the way never make much money. In the days of partnership investment banks (pre Glass-Steagle) the employees risked their own money. It was the big boring retail/corp banks that bought them all up as they couldn't ever get near competing with their returns.

    One point i read regularly on here is about high frequency model trading which is a concept I totally disagree with, but this can (and shuold) easily be solved/eliminated through exchange regulation not through tobin taxes. These are such horribly ill conceived ideas as it's you the consumer that will pay the price. This will just bring even closer the end of free consumer banking, something that should have happened years ago. Consumers in this country should be being charged about 25 quid a month to have a bank account... but of course they aren't, largely because they are being subsidised by the universal banking model that so many seem to want to end...

  • Comment number 41.

    'This is the important big contrast with banks, where investors and creditors knew that if everything went wrong, taxpayers would be there to pick up the bill. Which meant that those investors and creditors had less of an incentive to prevent banks from betting not only the farm but the entire landscape.

    On that view, we would want banks to become more like hedge funds, not regulate hedge funds out of existence.'


    This is perverse reasoning, surely?

    Banks hold people's current accounts and savings, as well as people's other assets (e.g. mortgages), hedge funds have banks and others investing in them, but whose money is it? What's more, ever since the Big Bang of electronic share registration, people's shares are held by banks in Nominee Accounts too are they not?

    Banks can, and do, gamble with these Nominee Accounts, do they not? They lend these funds to speculators who then trade/short-them.

    Liberal-Democracy (Social-Democracy if you prefer) has capitulated to the markets as arbiters of value. It makes no sense to assert that Governments can regulate as that's the very statism which has been abandoned in favour of markets determining value. The argument for the Hedge-Funds is that they don't so much serve as an early warning, as agencies which participate in the determination of market value.

    So what's this nonsense about regulation? This is political. We are not going to see the end of 'Social Democracy' any time soon, not without a total collapse, engineered economically by pressure from the PRC and its friends in the SCO. In the meantime, trends are not looking too good for Social Democracy though.

  • Comment number 42.

    #33 Justin150
    "The one thing I would like to see is more transparency in hedge fund dealings (centralised exchange for some type of hedging instruments maybe). That way the market has access to information on what they are doing"

    Transparency? Yes, we definitely need more of that. However, having centralized clearing of derivatives (hedging instruments) will not give anyone anything close to 'transparency'.

  • Comment number 43.

    Personally, the term 'hedge funds' have been used as a generic class of investors/speculators. Like all things in life, there is no 'one size fits all' way to describe something. Only fools and bureaucrats try to do that. There are hedge funds that take naked directional bets, but there are plenty more which buy hedges to protect their capital while taking bets. There are many ‘hedge fund’ that are very conservative - the only reason these funds are call ‘hedge funds’ is because they are located in tax efficient jurisdictions. Labelling everything under the sun ‘hedge funds’ does not make distinguishing the risky ones from the safe ones any easier.

  • Comment number 44.

    Hedging is a form of insurance.
    Insurance seems very popular with our elite politicans, maybe hedging will ''come in from the cold'' now.
    I wouldn't describe them as 'heroes' though.

  • Comment number 45.

    Hedge Funds are just glorified gambling syndicates what they win is theirs what they lose is theirs too as long as there is "no match fixing" or "doping" and no laws are being broken what is the problem.
    Of course this is simplistic but not necessarily wrong.
    I'm sure some tinkering could be done around openness, leverage, voting rights and length of time holding shares and some shorting intruments but in all honestly everyone has the odds they are just trying to find some dead certs and a few outsiders to come in.
    It does take two to make a market and i guess when one wins another loses.
    Let the funds pay their UKish taxes and let France and Germany deal with their own problems we have enough of our own.
    You could always invest/bet/risk your own money in a hedge fund itself or private equity fund shares or an absolute return fund or currency exhange or commodities, horse racing, football results etc. and see how easy it is.....

  • Comment number 46.

    Robert, What about the ratings agencies?
    Surely they helped to fan the flames!
    Their role in the whole affair seems to be slipping under the radar.

  • Comment number 47.

    Conjecture: Robert Peston's blog (book(s) and articles) serve as a safety-valve/sink-hole for those who otherwise do very well out of the financial leeching business we know as Social (Liberal) Democracy. Readers, viwers, commentators etc can huff and puff, but the bankers know their houses won't come down. The hope is that the outraged will just run out of puff....

  • Comment number 48.

    Warren Buffet turned down the rech stocks in the 90's because he didn't like investing in something he didn't understand.

    Good advice from one of the arch Capitalists (you might call him a winner)

    This is why hedge funds are bad investments - if I offer you a 'black box' which returns 25% how much will you invest first year...and then second year (if the first results in a 25% return)...and third, forth etc.

    This is also the reason (it's no coincidence) why many Ponzi schemes are disguised as hedge funds. There's no better way to protect your scam than to hide it from people - which is acceptable in the HF world.

    Personally I don't care if Lord Snootle-fart loses his fortune in a hedge fund gamble, but the losses of the rich are rarely limited to the rich. They often spread the loss around and recoup it from the tax payer or the consumer.
    What is concerning is the number of pension funds who have a hadge fund element within them. I don't think most people are aware of what is being ivested in on their behalf - and considering it's their future - I think they should be.

  • Comment number 49.

    Before we start using phrases like 'heroes' - which does downgrade other members of society who are labelled as heroes (i.e. Soldiers, Paramedics, Search + rescue etc)

    We should remember that many hedge funds are set up in tax free environment so that the investors can avoid paying tax on their investments.

    Is this a contribution to society (or rather not a contribution) we should be applauding?

    I presume everyone here is hoping that the hedge fund investors will walk into their corner shop and 'redistribute the wealth'.

    Unfortunately unless your small business is in Monaco (and not Manchester) then you will never see any benefit from hedge funds and their ficticious 'wealth creation'.

  • Comment number 50.

    "The fact is that hundreds of hedge funds went bust over the past couple of years.

    This is the important big contrast with banks, where investors and creditors knew that if everything went wrong, taxpayers would be there to pick up the bill.

    On that view, we would want banks to become more like hedge funds, not regulate hedge funds out of existence."

    This can't be done successfully without removing both depositor protection and central bank support, which can't be done without substantially increasing reserve requirements. This won't be done because the government need inflation to allow them to run never-to-be-paid budget deficits.

    What we will get will be lip-service to regulation and nothing will change.

  • Comment number 51.

    Here's another 'hedge fund story' - now what's interesting about this piece is this line:

    "The fact that the investors' identities are being kept under wraps - Lloyd is not putting any money in himself - and that the takeover would be underwritten by a New York-based hedge fund has set alarm bells ringing, including with Pompey's current owner Balu Chainrai."

    Why do you need a frontman if you're all straight and above board?

    Business will die without trust - no trust, no deal.

    http://www.google.com/hostednews/ukpress/article/ALeqM5gYCaWOuhtcrRyBs0OSRlDNK9jAQQ

  • Comment number 52.

    Let's be clear that Private Equity and Hedge Funds operate at totally different ends of most spectra and should never be lumped together as one class. Hedge Funds trade financial assets to make profits, they are skilled (or not) traders. Private Equity buys and improves (or otherwise) companies, they are skilled (or not) in rejuvenating companies. PE use leverage (debt) in each company they buy, but do not (generally) leverage the fund itself – the investments can “go bust” but a PE fund cannot "go bust", although it can of course lose all its investors capital. Hedge funds use debt within the fund - and therefore hedge funds can, and as stated above do, "go bust".

    None of the BBC’s broadcasters and/or bloggers consistantly draw these fundamental distinctions, and they are tasked with educating and informing. It is therefore hardly surprising that non-financial politicians struggle to understand who to listen to in this debate. Alternative Investment Assets are poorly understood and are therefore scary to those who are illinformed, and profitable to some of those taht are well informed.

  • Comment number 53.

    #41 Statist

    "Banks can, and do, gamble with these Nominee Accounts, do they not? They lend these funds to speculators who then trade/short-them."

    No, they do not. Assets held under custodian accounts and nominee account are segegated from the banks' balance sheet.

  • Comment number 54.

    The life of hedge funds will probably not last much longer. The alpha they seek is diminishing probably because the inefficiencies of the markets (which they trade on) are closing quicker.

    This also explains why hedge funds make more in turbulent times - because turbulence and panic create the anomolies required for profit (picking up pennies in front of a steamroller)

    ...and what does every business do when faced with a diminishing profit? - that's right folks, branch out into riskier and less well known areas - a sure fire way of creating major problems for yourself.

    Just as LTCM couldn't squeeze anything more from Bond arbitrage and instead took on Equities and the occasional arbitrage between announcement and takeover (which of course is not consistent and prone to unexpected events)

    The hedge funds won't want to close when the business dries up - they will simply look for other markets - and eventually get it badly wrong.

  • Comment number 55.

    Please could someone advise me whether I'd be best to invest in a privet or beech hedge fund, and how often I would need to coppice it? Thanks.

  • Comment number 56.

    40. At 1:18pm on 17 Mar 2010, bzzj wrote:

    "Being a worker in a big american one I dearly wish they were as I would earn far more not having to subsidise my colleagues in the corporate or retail bank"

    ......except you don't earn it do you? All you do is skim. The earners are the labour employed by the companies you invest in.

    ...or did they not teach you that in banking school?

    "Hedge funds are high risk/high reward, therefore the people who lose money in failed ones know the risks"

    So why can I look at several pension funds (right this minute) who hold hedge fund investments?
    Is that something else you're missing out on?

    "Consumers in this country should be being charged about 25 quid a month to have a bank account"

    What for? - the protection of my electronic money? - it's not like I need a safe anymore.
    The borrowers pay the interest, so what service does a bank provide for the saver? Comfy chairs? cheesy smiles and hello sirs? rainforest worth of pamphlets?

    I suppose being charged for a service you don't get is expected from someone who gets paid without earning.

  • Comment number 57.

    "This is the important big contrast with banks, where investors and creditors knew that if everything went wrong, taxpayers would be there to pick up the bill. "

    Nonsense - the bailout of the banks happened because their failure would have destroyed too much capital too quickly and caused mayhem.

    It was their size which brought on the bailout not their status or investment strategy. A hedge fund would, could and already has grown to a size where it had to be bailed out or the same result would have occurred.

    Who do you think eventually picked up the bill for LTCM? - if you think the banks didn't pass it on to the consumer / tax payer / mug - then you are living in cloud cuckoo land.

  • Comment number 58.

    44. At 1:33pm on 17 Mar 2010, SSnotbanned wrote:

    "Hedging is a form of insurance."

    A 'form' - maybe.

    ...but when I insure my house (which is real insurance) I do it knowing that the insurance company (or at worst the industry) will pay out in the event of an insured loss.

    However banks sell insurance without such guarantees, in fact as I bank I can insure everyone on this blog for a £5 premium against any financial loss incurred for writing on this blog when you should be working.

    It's meaningless of course - just as a CDS is - but hopefully nobody (or not enough people ) will claim any more than I can collect the new premiums in.

    ....some call this a Ponzi - banks call this insurance.

  • Comment number 59.

    Too many people on this blog today are not well informed.

    Hedge funds do fail

    At least one has failed that required a bailout

    If the banks were not able to bail it out then the Government would have been forced to.

    To believe the line that 'only rich men stand to lose in hedge funds' - is to deny historical fact.

    Still, I suppose when the alternative conclusion is "oh dear, the whole thing really is a pack of cards" - I can understand why denial is preferred.

  • Comment number 60.

    Hedge Funds cannot operate without banks and in particular, Investment Banks. In effect, Hedge Funds buy the "products" that Banks create and "underwrite" and most often those products are designed by the Hedge Funds themselves. Hedge Funds distribute to investors, mostly institutions. To be effective, regulation and "policing" should look at the originator of the risk and that is the Bank. Guidelines on risk should be laid down for the Banking fraternity and the Directors should be hit hard if they abuse their position as they are in any other industry.
    Don't blame the Hedge Funds, Capitalism needs the entrepreneurial approach .

  • Comment number 61.

    If capital markets were introduced to provide a source of cash resource to general wealth creation opportunities then fundamentally hedge funds do not enable wealth creation they shift wealth around - if global growth is 3% and returns from hedge funds are 10% then someone is losing out big time. Hedge funds / index trackers are nothing short of gambling and the complex maths used to predict trends are the same as counting cards in Vagas - at least the casinos are clear and ban these scams.
    We need to get real you cannot sustain getting something for nothing at the end of the day we need real wealth creation not shifting it around to the benefit of the few.

  • Comment number 62.

    53. spikegifted 'No, they do not. Assets held under custodian accounts and nominee account are segegated from the banks' balance sheet.'

    What's that got to do with anything? Didn't the banks hive off their stock-broker arms in the late 90s? Who actually owns/controls the shares in Nominee Accounts and I'm not talking about technical Beneficial Ownership. Don't beneficial owners sign lots of their control away in the fine print when they opt for the service? Agreed, there may well be strict FSA rules on how these accounts are ring-fenced, but haven't you noticed anything about FSA regulation?

  • Comment number 63.

    44. SSnotbanned wrote:
    Hedging is a form of insurance...

    You're right, hedging is actually a method of risk reduction, but don't be misled by the name. Hedge funds' role is not to hedge for their clients. In reality a hedge fund is simply an investment fund that is not tied down by regulations like those to which pension funds must adhere - meaning they are free to trade on margin, short sell, use complex derivatives etc.

  • Comment number 64.

    Hedge Funds, per se, are not a problem it is the type of exotic derivative and swap products that may contribute to instability.

    Trading on one's own account by banks and financial institutions in these synthetic financial instruments like consolidated debt obligations would also not have been a problem without the downright false credit rating agency rating of the products and duff auditing that hid the problem.

    The key to the CDO problem is that loans were made against assets of dubious overvalue to borrowers who were themselves at high risk of default without a rational evaluation of the risk. Consolidated these and the quality of the consolidated asset does not improve.

    I blame the ratings agencies and the auditors (and certain lawyers). Both failed in doing what they led everyone to believe they were expert in. These risky loans should have been priced appropriately to match the risk. Now, the pricing problem (i.e. interest rate) was not only the responsibility of the lender, but also of the Bank of England and/or the FSA whose primary role was to ensure stability and sufficiency of reserves - they failed in the job. The Bank kept interest rates far too low. The FSA/the Bank did not ensure that lenders under their supervision allowed, and priced, sufficiently for probable defaults. And what was HM Treasury doing monitoring the way that the FSA and the Bank were carrying out their task!

    On HBOS and NR: the management (with the probable active connivance of the auditors, ratings agencies and the regulators) blew away the banks. Hedge funds punted on their stupidity, but it was the lenders who created their own duff loan books if they hadn't been so incompetent the market would not have collapsed.

  • Comment number 65.

    Robert,

    "and her script did not allow for a different version of events."

    This sounds just like the same approach taken by your colleagues at the BBc who report on anthropogenic global warming: they tolerate no other version of events. Perhaps you could pass on the message to be a little more impartial and disinterested when the beeb reports on climate change matters. Off topic comment, I realise. My apologies.

  • Comment number 66.

    Private Equity: They get preferential loans from the (idiotic!) banks, buy assets at a low price with the hope of selling at a high price - in some case having already sold them before buying them. They thrived on near zero interest rates and the Bank of England, who kept rates stupidly low helped them immensly.

    (There is also of course the pre-pack bankrupcy where esentially the existing owners of a non-performing company have it taken from them by the senior creidtors for next to nothing - or nothing at all - not quite like NR but quite similar!!! Also see Portsmouth FC.)

  • Comment number 67.

    Robert, your piece is factually incorrect - LTCM went bust in a big way in 1998 and had to be rescued by a reluctant consortium of (mainly) US banks, at the insistence of the Fed. Whilst it's very true that the current crisis was not caused by hedgies, many better informed than me (warren buffet for example) consider the Hedge funds to pose the greatest risk to the financial system. Even with my limited knowledge of how hedging works, a recent article I read by the Former Risk Manager of a major bank (think it was HBOS) said both sides of a major hedging transaction booked a huge profit on the same deal - this surely cannot be correct.

  • Comment number 68.

    Unfortunately I suspect much of the issue is cultural. A cynic would also say it is very easy to regulate an industry which you perceive as damaging but get little benefit. If olive oil was thought to be damaging Britain would be much more comfortable with a tax than say Spain or Italy (Nothing against Olive oil just first thing I could think of)

    Surely however there seem to be several key issues which don't seem to addressed. The first one echoes Roberts point, if certain practices or products are deemed harmful then ban or regulate them accordingly. It is nonsense to argue that a hedge fund selling short naked is damaging but if did it it isn't (If I had the money that is)

    The second issue is whether preventing the practice in the EU will actually stop it or just ensure that Europe will suffer the damage but that all the jobs, profits, taxes and the the good things that such funds create go outside the EU.

    The really key point though is that I have seen lots of rhetoric and vitriol about a bogeyman speculator/bankers conspiracy worthy of third world dictators.

    If the government removed the speed limit on motorways, gave tax incentives to companies to deliver quicker and left gaping holes in the crash barriers it might not be a surprise if there were more injuries.

    Most financial crisis have a common root. A long period of growth aided by cheap money, this results in extensive and leveraged borrowing until a relatively small blip cascades into a major collapse. Both Britain and USA have gone through this cycle.

    Governments must work on developing the basic monetary and fiscal policies to avoid creating these situations and acknowledge that they can't guarantee growth just by low interest rates and high borrowing. An occasional short recession may happen but recessions are the economic equivalent of earthquakes, it relieves stresses and imbalances and a few little ones are preferable to 1 huge one but sooner or later those stresses will come out.

    Regulation can and should be there for fairness and fine tuning,

  • Comment number 69.

    So just what is the up side of hedge funds ??? from the article i see none.

  • Comment number 70.

    Know it all on the wall - 'when I insure my house (which is real insurance)'.
    Interesting, your 'insurance' is the same as a CDO. The insurance company aggregates your policy with all the others, knowing some, but not all will claim, smoothing the risk, and making a margin on an up front premium which is then invested in - shock - investment vehicles. Sometimes hedge funds - to bring this all full circle.
    CDOs were another way of parceling up risk as the banks knew that lending to people who could not afford a mortgage would go wrong. US banks were criticised for being TOO CONSERVATIVE in their lending prior top 1989, hence the Glass- Steagal repeal allowing them to get the investment banks to use this 'creative' mechanism to force Clinton's policy along.
    The difference is too many went wrong, inevitably because of the economic backdrop.
    If all your houses blew down, The Insurance company couldn't pay and guess what? the Govt would be sucked in too. And then it would be 'greedy insurers',
    Hedge funds are just another investment vehicle, just more geared. They actually bring more liquidity to the market and can provide a floor when things are dropping (as they have to close their short). Incidentally, your insurance company probably gives them the stock borrow to short via your insurance policy!

  • Comment number 71.

    Oh dear....these 'honest banks' all seem to be in court a lot these days.....

    http://news.bbc.co.uk/1/hi/business/8573068.stm

    It's time to bring them all down - they are not just socially useless - but actually socially damaging.

  • Comment number 72.

    # 33. At 12:04pm on 17 Mar 2010, Justin150 wrote:

    > The EU directive is a political power grab, the French govt in particular
    > (although there are a couple of others like Denmark) despise the concept of
    > private equity and hedge funds as a principal and in the French case it is
    > simply an exercise in trying to weaken the London financial centre - possibly
    > for the sole reason that it is based in the UK not Paris. As a power play
    > it is typical of the total corrupt nature of EU politics.

    The idea is to be hard on Londoncentricity and the causes of Londoncentricity. In particular, Europe has low tolerance for rogue banking states like the UK. As it happens, London's size has also crushed commercial centres in other parts of Britain, so it gets very little sympathy from outside.

    It's time for those fat cats to wise up. Either get with the programme, or get out of the way. One way or the other, London has to change its ways, and we're better off doing it ourselves before we are forced to.

  • Comment number 73.

    67. brownandout 'many better informed than me (warren buffet for example) consider the Hedge funds to pose the greatest risk to the financial system.'

    Have you noticed how BBC reporters and news presenters these days now provide their expert views on the news and don't just report it any more? After all the Select Committee inquiries (on both sides of the Atlantic) asserting that those in Financial Services were/are not just out of control, but often don't know what they're doing, you reckon Robert Peston or Stephanie Flanders are going to post the definitive analysis?

    'Out of control' is now de rigueur non-government aka economic/political anarchism - what more could one ask of a giant set of roulette wheels? The clue lies in the term 'hedge-fund' does it not?

    As to what 'causes' what, well, cause isn't really the sort of term which does a lot of work anywhere. People need to wake up to the fact that some people make a very good living out of casino capitalism, and like all gamblers, they will cheat and steal to keep their habit. Anyone with any experience of working with addicts knows how hopeless it is to expect change without forced withdrawal and permanent deprivation of opportunity.

  • Comment number 74.

    71. writingsonthewall

    Excellent news! Let's hope this is just the start. Let the cascade begin....!

  • Comment number 75.

    @73 Statist

    Warren Buffett didn't say this about hedge funds. What he did say is that "derivatives are financial weapons of mass destruction." Hedge funds, if well managed, are no worse than any other investment vehicles.

    It always seems to me that there are two main problems that have caused this financial mess:

    1. Irresponsible lending - e.g. mortgage lending to people (especially in the US) who clearly hadn't got a hope or prayer of meeting their debt obligations in the future. No planning for the unforseen downturn in personal circumstances etc.

    2. Leveraging magnifies investment gains AND LOSSES. It amazes me how many investors (and institutions) get drawn by the magnified gains part and completely fail to consider the possibility of magnified losses, some of which have brought about the collapse of major financial institutions (e.g. Lehman). Going along with this is understanding the level of risk they are taking with money. All investment carries some degree of risk and that needs to be properly managed by considering possible losses as well as the gains they hope to make.

    It doesn't matter whether it's a hedge fund, bank, insurance company, private equity company or private individual. If these two potential problems are kept in mind at all times then a lot of this mess could be avoided. Blaming hedge-funds alone is short-sighted and counter-productive.

  • Comment number 76.

    It seems that Anglo-American hedge funds are loathed in Europe.
    Rightly or wrongly, they are seen as useless, parasitic "clubs" that are out to enrich themselves, regardless of the damage they may cause to employees or shareholders.
    The "wealthy" people of the world "feeding" off the labour of others?
    Greed for greeds' sake?
    A "cancer" on the body of capitalism?
    Is any of that true?...I don't know.
    But the French have a large, active communist party, and to them hedge funds must represent the "mortal enemy".
    Capitalism has gone badly wrong in the last few years, and how much did hedge funds play a part?
    "Skimming", "profiteering", "parasitising".....who knows?
    Perhaps they are actually useful, wealth creators, or perhaps not.
    All those of a "left-wing" persuasion may find them utterly repugnant.
    Les "hedge-funds" Anglais sont un "limace" dans le jardin????
    I sit on the fence on this, but they do seem to have an image problem.

  • Comment number 77.

    75. suchan104 It always seems to me that there are two main problems that have caused this financial mess:...

    It doesn't matter whether it's a hedge fund, bank, insurance company, private equity company or private individual. If these two potential problems are kept in mind at all times then a lot of this mess could be avoided. Blaming hedge-funds alone is short-sighted and counter-productive.'

    Yes, but they didn't want to avoid it, they wante dto profit from it and just avoid the liabilities, and this they did by socializing them! All of this is driven by the same basic lure/mechanism - The Primrose Path. See Howard Rachlin etc on this.

    Remember how Cuba changed? Oddly, this entire area of science has been very much on the back burner in recent decades, whilst paradoxically exploited by those who've done very well from it.

    What we're seeing now is just lots of huff and puff as I said...:-(

  • Comment number 78.

  • Comment number 79.

    Cancel all outstanding transactions with banks and hedge funds as debtor/ creditor. I'm tempted to say include the pension funds.

    Lots of angry formerly rich people
    Debt problem sorted.

  • Comment number 80.

    #72 "rogue banking state" - that hurts

    Now tell me what are the figures for the leverage that the major French banks were operating under, lets talk about Credit Lyonnais exactly how many times has the French govt bailed it out over the last 20 years. Then lets move on to Germany and the Landesbanks and ask how many of them would have been technically bust were it not for the govt guarantee.

    People in glass houses should not throw stones

    My point, which you seem to accept with your comments on Londoncentricity (which may not be an accepted word but I do like it), is that the EU directive has absolutely nothing to do with either economics, financial markets, regulation or even protecting savers from the next banking crisis but is nothing more than an attempt to do down London and anglo saxon capitalism because the EU politicians cannot stand the idea of something happening outside of their control and in the French case because the financial centre of Europe is not based in Paris. It is, to be crude, xenophobic rubbish

    Next we will have EU politicians telling people who they can sell their shares in companies to (already on the agenda) then EU politicians will want to control who we sell other assets to in case we sell it to "the wrong sort of people".

  • Comment number 81.

    Yes, Robert makes a good point....
    The public didn't have to bail out any "bust" hedge funds.
    But hedge funds could be, and should be useful and successful financial institutions.
    Perhaps they just need the same thing as the rest of the world of finance.....serious regulation.
    R.P. is a fan of hedge funds, let's hope he is right.

  • Comment number 82.

    I see that writingsonthewall is still peddling his socialist/marxist rubbish :-)

    Oh well each to their own.....

    In answer to the question about why you will very probably end up paying fees if the universal model ends, is that as some have pointed out - in a universal bank they effectively subsidise the cost of the account. Although I know some one will jump on this, the ability to cross sell you products (insurance, stock broking, wealth services, credit cards ) generates revenue

    Its not just about protection of your electronic money. While you might think that dead easy, it actually costs a fortune to pay for the systems to run accounts, the branches, data centres etc etc. Its especially a problem for older banks with legacy systems.

    For example, if you are an average customer who pays in a base salary and then pays out lots of it quickly in direct debits, debit cards etc - there is not a lot for the bank to make a profit on. In fact the cost of those transactions, and the systems to run them probably costs them money. Banks worse nightmares are people who run accounts with nothing in.


    Nothing is free in this world................some banks already charge and I suspect more will start to do the same.





  • Comment number 83.

    # 80. At 8:03pm on 17 Mar 2010, Justin150 wrote:

    > #72 "rogue banking state" - that hurts

    Thanks for the feedback.

    > Londoncentricity (which may not be an accepted word but I do like it),

    Thanks. Again.

    > the EU directive has absolutely nothing to do with either
    > economics, financial markets, regulation or even protecting
    > savers from the next banking crisis but is nothing more
    > than an attempt to do down London and anglo saxon capitalism
    > because the EU politicians cannot stand the idea of
    > something happening outside of their control and in the
    > French case because the financial centre of Europe is not based
    > in Paris.

    I hope we find that the Internet does away with all the "centres" without any help from the French, thank you very much. It is touching to see some old fashioned “patriotism” coming out, but it is irrelevant, I thought. Who cares about “where”? The point of the network is to make territorial location worth zero. Especially with informational industries, like money, which can be done anywhere by anyone, without the burden of being in one place.

    > Next we will have EU politicians telling people who they
    > can sell their shares in companies to (already on the
    > agenda) then EU politicians will want to control who we sell other
    > assets to in case we sell it to "the wrong sort of people".

    If it were good for all of us, not just London, I’d keep things as they are. But I keep coming across Londoncentricty. We can’t have a dirty old city in the middle of nowhere dictating terms for the whole of Britain. Sorry – no dice. Here in the hills of Wales, we’ve got more in common with Europe than this Anglo-Saxon malarkey you’re on about.

  • Comment number 84.

    Over the last few years I've seen some very negative "left-wing" rhetoric coming from Europe about Anglo Saxon style capitalism, and particularily hedge funds.
    Much of it may be misplaced or misinformed.
    Some of it may be relevant.
    But to those hedge funds that were successful, and added real value to the economy, I say "well done".

  • Comment number 85.

    There are three major kinds of market analysis: fundamental, technical, and technical-analysis-of-propaganda.

    When you are using technical-analysis-of-propaganda, and the propaganda seems to be blatantly one-sided, it's generally a good idea to favor the opposite side.

  • Comment number 86.

    #82

    Surely you must realise that high street banks are on the way out?

    Cash, credit cards, debit cards and internet banking are increasingly used; they only require minimal human involvement.

    Banks survive by borrowing from and lending to people who want those services. They are also allowed to gamble with the public as guarantors, I don't know why.

  • Comment number 87.

    Robert

    Shame on you for slightly dodging the issue?

    What about Soros type individuals/operation - where do they get the golden trough clout and funds to bet against currencies that are in trouble?

    If this isn't a triad conspiracy between banks, hedge funds and parasite speculators what is going on?

    Are the heads of state of Iceland and Greece complete liars when they say that their countries' financial situation is made much wosre by sepculators?

    Are Merkel and Sarkozy deluded by trying to protect the Euro currency from 'goldmen with sacks' and their underhand role in protecting the dominance of the US $

    Why are the financial parasites being protected by the media against enquiry and scrutiny?

    I'd have thought you of all people would be the one to lift lid on this can of worms - so that we can see how they squirm in their financial nests?

  • Comment number 88.

    # 84. At 10:12pm on 17 Mar 2010, stevewo wrote:

    > Over the last few years I've seen some very negative "left-wing" rhetoric
    > coming from Europe about Anglo Saxon style capitalism,

    That might be because they have nicer living conditions in general
    than we do. I'm sure you heard about how bad Britain is at
    everything. Especially banking.

    We might be well advised to listen to our betters, in these matters.

  • Comment number 89.

    #71 writingsonthewall wrote:

    "Oh dear....these 'honest banks' all seem to be in court a lot these days....."

    Nice link. However there's not a cat in hells chance they will win the case as I guarantee the banks compied with all the relevent laws at the time and it will drag out for years.

    Unless a 'hindsight' law is passed then I'm afraid they've got away with it and its muggins who will suffer as usual.

  • Comment number 90.

    84. stevewo 'Anglo Saxon style capitalism,'

    Descendents of the Angles and Saxons were very critical of this type of banking. The model to which you refer evolved in NYC did it not? Their demographics are not Anglo-Saxon at all, although some would be happy to have many think otherwise.

  • Comment number 91.

    Hedge funs and banks can lsoe billions and not much happens to them.

    In the news today a bank clerk who stole £120,000, and could face up to six years in jail, was found hanged. A man, assume to be her husband, was also found hanged.

    Six years for £120,000 and two lives!

    As a share of the £1trillion debt, I felt someone has stole £16,000 from each and everyone of us and got away it laughing.

  • Comment number 92.

    # 91. At 10:06am on 18 Mar 2010, puzzling wrote:

    > As a share of the £1trillion debt, I felt someone has stole £16,000 from
    > each and everyone of us and got away it laughing.

    Only if we let them. And we havn't. It's just too much money, and
    we want to see bankers doing the perp walk. Now.

  • Comment number 93.

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

  • Comment number 94.

    Long short equity are the most common hedge funds and they are on the whole a great product for pension funds and insurance companies to invest in. The are also very efficient. Let me explain. Let's say that a traditional 'long only' fund pays for an expensive analyst to study oil companies continuously, looking at their financials, meeting the managers, studying macroeconomic signals. As a result of all that expensive work the analyst recommends to buy Shell rather than BP because he believes it is a better run company. Then the stock market falls 20% and all that research was pretty pointless.

    Now a long short equity market neutral fund could make most efficient use of that expensive analyst's work and buy Shell and short BP. If the analysis was correct, it doesn't matter which way the FTSE moves, it just matters that the analyst is correct that Shell is better run than BP. If enough analysts come to the same conclusion, the management at BP will feel pressure to improve as their share price goes down.

    The investors in such a fund have consistent uncorrelated returns. I'd like my pension fund to invest in funds like that.

  • Comment number 95.

    #91 and 92, Which £1trillion debt? current government debt is 750 -800 million, pick a figure. a small part (about 50 billion I believe) represents liabilities from Northern Rock/Bradford and Bingley but that is offset by the mortgages held which are of roughly equivalent value and there may or may not be a loss eventually but will only be a fraction of that sum. The same applies to any other money lent to the banking system and any shares held. Govt. debt calculations are bit strange but given that the government borrows at less than it charges the banks and charges for any guarantees it's not impossible that at the over the next 5 year or so a small profit may be made.

    The bulk of the debt is because the government has spent, invested or wasted (depending on your point of view) more money than it has taken in taxes etc. It has been exacerbated because in a recession more has to be spent in benefits and less money is earned to pay tax (Oversimplification I know)

    We have all benefited from that in either receiving more benefits or paying less taxes or even having a job if we were beneficiaries of this largesse.

    One of the big reasons for the so called structural deficeit is the expctation that the financial services industry will not be contribution 30+ billion a year in taxes.

    However sooner a later a bump was coming, look in a few old mags, as interest rates rose (indirectly a government decision) everyone was expecting people to have difficulties paying mortgages and the deficit was creeping up then at the height of a boom.

    To its credit the government has only got to the same stage as Germany and France.


  • Comment number 96.

    Statist - I think you are spot on that the banks directors did not know/understand what was going on. I remember seeing a programme Jon Moulton (formely of Alchemy the VC's) shortly after the credit crunch hit when he said he had been in a meeting with all the CEO's of the big banks and they did not understand CDO's and the risk they posed - This is the problem with Hedge funds and the so called derivatives markets, it seems to me to be emperors new clothes - i.e "invent" a name for a "product" which the bosses don't understand, then play a game of financial pass the parcel until it explodes somewhere!

  • Comment number 97.

    93. Is a contingency analysis. It is not personal.

  • Comment number 98.

    Overall, not a bad article. However,...

    "This is the important big contrast with banks, where investors and creditors knew that if everything went wrong, taxpayers would be there to pick up the bill. Which meant that those investors and creditors had less of an incentive to prevent banks from betting not only the farm but the entire landscape."

    Did investors and creditors really know that the governments would come to the rescue of the banks? Investors certainly do not want to see their bank needing to be bailed out as nationalisation either dilutes their holding or wipes it out in the case of Northern Rock.

  • Comment number 99.

    96. brownandout 'I think you are spot on that the banks directors did not know/understand what was going on.'

    It's a standard urbane ploy to assert that things are too difficult to understand or one is not clever enough to grasp such things.... It's part of the verbal armoury.

    The fact is that if one is a CEO (or manager at any level), one is accountable for behaviour, not just of oneself, but one's subordinates. Ignorance is it an excuse. It's just a ploy. This has nothing to do with knowledge or awareness. It's just what we mean by the word responsibility.

    Intention is not the last word here, just as it isn't in homicide or manslaughter etc. This was a point made some time ago when considering whether Prison Governors are responsible for deaths in custody, even if the deaths are self-inflicted (suicide). There is a duty of care. The question is, how far does that go when one is paid the big bucks? To date, the focus has been on Public Sector organisations - no surprise there, as it facilitates privatisation.

    Too much is allowed by way of apologies, and excuses by way of psychological states (knowledge, belief, intention etc).

    It is most cleverly/venally done!

  • Comment number 100.

    Robert, thanks for writing a piece about hedge funds. Possibly one of the few vaguely positive articles on the subject in the last few years.

    Here are the facts:

    80% of European hedge funds are based in the UK providing GBP5.4bn in tax revenue to the economy and employing up to 40,000 people.

    Not all hedge funds make money; in fact the minority (around 40%) survive longer than 5 years.

    The big payouts to hedge fund managers are normally the people at the top and are purely based on good performance of the underlying fund (hence the 'performance fee').

    The alternative investments fund manager directive was drafted by the French & German socialists and contained such little understanding about the industry that some parts of it were simply impossible to implement if done directly as drafted.

    The directive also contained no impact assessment (standard for most directives) and when one was eventually done, it was widely acknowledged to contain no consultation from any of the stakeholders in the industry.

    To answer the comments that hedge funds are of no benefit:

    If all UK pension funds had a 25% allocation to hedge funds in the last few years, the current issue of deficits would be far less of a problem... something of large benefit to joe public.

    The Asian currency crisis in 1997 was widely decried at the time to have been caused by 'speculators.' An investigation later on by the IMF showed this to be a completely false allegation. I suspect the same could be said of Greece now - would the various austerity measures proposed have been done so quickly if the markets did not show Greece to be in such danger??

    When did making money become so bad? Some industries just pay more than others, it has always been the case for hundreds of years.

    My message is simple, don't fear what you don't understand. Sometimes the worst-sounding things can be very beneficial.

 

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