Monday, 13 July 2009

Don't blame it on the hedge funds...

I can't help feeling that Will Hutton's piece in the Observer yesterday missed the target a bit when he had a pop at hedge funds. As I've argued before, I think hedge funds are such a broad asset class these days that it's almost a waste of time trying to say anything about them as a group. The range of strategies employed varies so much that you can't really pin much on them as a group. But that also means that you can pin everything on them:
hedge funds do represent the unlovely priorities of Anglo-Saxon capitalism. They were an important factor behind today's financial crisis.

a) Plenty of your bog standard long-only managers have exactly the same mindset. b) But was there anything unique about hedge funds in terms of their role in the crisis? Some of them bought stuff that they mispriced and took a pounding, some of them were leveraged up to the hilt and therefore caused serious problems to others, when unwinding positions. But couldn't you say that about some of the banks too?

In fact, as he points the hedge funds that really caused the trouble were those linked to major institutions -
It was the collapse of two Bear Stearns hedge funds and three BNP Paribas hedge funds in July and August of 2007 that triggered the paralysis of the interbank markets in New York and London.

And this bit is just cheeky -
Along the way, Bernie Madoff's hedge funds were shown to be a $50bn rip-off.

That's a bit like describing those emails you get from Nigerian oil company executives offering to transfer $10m to your account as an investment opportunity. Ultimately it's just a scam, whatever it claims to be. Madoff was basically running a ponzi scheme dressed up as an investment vehicle. Trying to use this as a stick to beat hedge funds with actually misses the rather bigger point about the failure of due dilligence on the part of those 'professional' investors who stuck their clients' money in Madoff's scheme.

And finally -
A few hedge funds do bring innovation to investment management; most are an economic cost.
I totally agree, but once more what is unique to hedge funds about this? In my humble opinion most 'investment' is an economic cost because the fixation on the short-term results in increased trading which just eats up your cash. And I'm not convinced that increased trading leads to more 'efficient' pricing, or whatever the supposed market benefits are.

None of this is to take issue with his broader point about the fixation on trying to defend hedge funds, and keep them in the UK, or the potential need for regulation (though to be honest I'm not sure what the answer is here). But to be honest the surprising thing about hedge funds, in terms of their role in the crisis, is that they didn't do the damage many (including me) expected.

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