The hedge fund industry in a recession is like a week too long in Vegas, or dating someone with a personality disorder – a rollercoaster of highs and lows that leaves you either totally fulfilled or completely devastated, and emotionally drained either way. The last week has been both an glittering advert for jumping aboard the hedge fund crazy-train, and also a giant flashing sign telling you to just put everything in an ISA.
First of all, the highs. Those worried about the world having potentially deviated from its traditional axis will be relieved to note that the 33 top staff at London hedge fund NewSmith shared a bonus спешного of ?30m between them for their previous year’s work, despite the company having seen ?2bn withdrawn from its funds over the last 18 months. What’s more, even if you didn’t get to buy a yacht this year, next year’s looking good. Hedge fund index Eurekahedge said yesterday that its index has grown for the seventh straight month, the best performance in a decade. It matches the findings of Hedgefund.net, who reported rising levels of investment over the last five months, bringing total assets under management across the sector to nearly $2tn, heading back towards the pre-crisis peak of $3tn; and Lipper Global Hedge Fund Classifications, who said the vast majority of funds turned a profit last month.
The hedge fund industry is also looking strong in the face of potential tough regulation on its activities by the EU. Since Sharon Bowles, the chair of the parliamentary Committee on Economic and Monetary Affairs said that most of the European Parliament agreed on making the regulation lighter, both Boris Johnson and even the Church of England have weighed into the debate calling for the same light touch – Johnson because 80% of the European hedge fund industry is in London and he doesn’t want to see it go to Switzerland, the Church because hedge funds are one of their favoured investments. Hearteningly, managers are saying that even if new directives came in they still have faith in London, one recently comparing it to the Wimbledon tennis tournament: “Businesses come to London because they have the best courts, the best talent, the best infrastructure, and a great championship”. Hedge fund managers are meanwhile also fighting Russian corruption and telling Tim Geithner how to run the Treasury – the industry seems to be well on the way to profitability and respectability, right?
Well, no. On the front page of the FT today is “one in five hedge fund managers found to be misrepresenting facts”; more euphemisms come later with “hedge fund managers’ representations about their funds differed from reality”. Yes, between-line-reader – one in five hedge fund managers are lying scumbags, who will tell you that their fund has hundreds of millions of dollars under management and that most of their profits are spent on helping injured kittens. Or, in the case of one fund, they’ll tell you their partners have no criminal record but it later emerges that actually they do, having stolen a Chinese sailing boat (?!) in the past.
Dragging the industry further into the mire is the case of the ex-Bear Stearns employees who are accused of fraud, by lying to investors about the health of their hedge funds (which were backed by that reliably fund-destroying asset, the sub-prime mortgage); the trial of Matthew Tannin and Ralph Cioffi, who is also accused of insider trading, started yesterday. Boris Johnson’s flagwaving for the industry is facing scrutiny, after it was revealed that over half of his election campaign war chest came from the financial sector (including from hedge funds). And while some managers are sloppily comparing London to prestigious tennis tournaments, there are others who are still saying they’ll bugger off to Asia if the EU directives are passed, purely because the rules won’t let them operate.
The new rules in their current form would prevent EU investors from investing in non-EU-based funds, as well as preventing them from keeping their holdings in non-EU banks – UK investors would have a much smaller pool of potential investments to choose from, while funds would have a much smaller pool of clients. Now that the Church and various charities have entered the fray, saying that over-regulation could lead to their good work being hampered, the regulation waters have been muddied all the more. One thing remains clear – find out if your hedge fund manager has a predilection for stealing Chinese sailing ships before you invest.
