Magazine article The Spectator

Don't Blame the Hedge Funds, They're Less Culpable Than Governments

Magazine article The Spectator

Don't Blame the Hedge Funds, They're Less Culpable Than Governments

Article excerpt

Hedge funds can be accused of many different sins, not least because they operate in many different shapes and forms across the investment universe.

As a label, 'hedge fund' is so loosely generic that generalising about the sector is almost as pointless as trying to corral it with tighter regulation, as EU finance ministers have been doing this week. Some hedge funds pursue, with brilliant results, the contrarian hunches of individual fund managers. Some cheat by trading on insider information or false rumours.

Some are 'long-only', meaning that they buy and keep things that they expect to appreciate in value. Some are habitual short-sellers, seeking to profit from things they expect to depreciate. Few claim they do what they do in order to make the world a better place. But likewise few would accept that to profit by betting on the impending collapse of a company or national economy is either unethical or (if it happens to be your own economy) unpatriotic. Hedgies might accept that their trading contributes to volatility and thus to bouts of market panic, but no one seriously accuses them of creating the financial crisis: that was the work of ill-managed banks and incompetent governments. Furthermore, hedgies point out that their sector is fiercely self-regulated in a Darwinian sense: in the past two years, hundreds of weaker funds have gone bust, and not one of them asked for a government bailout.

So the new EU directive on hedge funds is misguided - it is damaging to London where most of the hedgies live, and stirred Boris Johnson to put up a robust fight against it. But George Osborne chose not to make a stand on it at his first Ecofin meeting on Tuesday.

The directive seeks to enforce greater transparency, to restrict funds' ability to borrow, and to make it more difficult for them to raise money from European investors. But in reality it is little more than a German-led attempt to deflect as much blame as possible for the subprime crisis - in which some of the worst offenders were state-backed German banks that invested heavily in toxic US paper - and the evolving European sovereign-debt crisis.

The directive may well hasten the exodus of hedgies from London to Zurich or Geneva that I wrote about here last autumn, but most funds are already domiciled in, and able to trade from, havens far beyond the reach of Brussels - so highly unlikely to change their patterns of trading. If that means they will return with new vigour (alongside investment banks that have vastly more capital to deploy than any individual hedge fund) to the very Anglo-Saxon business of trashing the government bonds of southern euro members until the point at which the recent 'rescue deal' can no longer hold the single currency intact, perhaps it will teach EU leaders not to waste time grandstanding when they have such massive problems of their own to address.

Rising from the ash

For every new problem thrown up by modern life, there's an entrepreneur somewhere beavering away to create a solution. Last month I introduced you to 'absence management' as the smart response to an epidemic of public sector absenteeism. This month's problem is volcanic ash, and the possibility that its plumes and drifts could disrupt air travel in unpredictable patterns for months or years to come. …

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