Newspaper article The Evening Standard (London, England)

Thai Troubles Are Landing the Hedge Funds in a Mess

Newspaper article The Evening Standard (London, England)

Thai Troubles Are Landing the Hedge Funds in a Mess

Article excerpt


THIS column pointed out a few weeks ago how absurd it was that the debt markets rated Thailand as a much safer place after the summer's military coup than before- an anomaly first highlighted by Jonathan Compton of Bedlam Asset Management.

One imagines investors feel differently now after the bizarre behaviour of the ruling junta in trying to impose capital controls on foreign investors to stop the Thai baht rising too much on the foreign exchanges. The consequent huge capital losses equity and debt holders have experienced should remind them that risk is never absent from markets.

One lesson of this is that governments, even elected ones, still have not got their minds round the implications of financial-market globalisation.

They have not fully grasped that they are no longer masters of their own destiny. But on a more local level, there is also a more pertinent chapter to be written in this story, for it is not just the military junta that will end up looking stupid. The real casualties could well turn out to be among the hedge funds.

Hedge funds in Asian markets gear up like there is no tomorrow, and debt-to-equity multiples of 20-1 are not uncommon. Just think of the maths.

The Thai equity market dropped 15% in one day. A typical hedge fund could have about 10% in Thailand, given the country's weighting in terms of Asian economies. So a 15% drop multiplied by 20 times gearing wipes out the entire capital of the typical hedge fund one-and-a-half times over.

Nor is it just the bulls that have suffered.

The announcement from the junta was the signal for massive shorting.

But it is an open question excuse the pun - how many of those positions have been successfully

closed out, given the lack of liquidity and depth in the market.

Alternatively, look at the hedge funds that play the debt markets - the losses there are even more savage.

Politeness and the laws of libel do not allow me to name funds I suspect are in the Amaranth-style position of finding out the hard way how gearing can cut both ways, but friends tell me there are several, and big bucks are involved.

No doubt their pain will become evident over the holiday season to their investors, if not to the public. It could yet be quite messy - an interesting New Year test perhaps for the resilience of markets.

Getting it right at the Grid GIVEN that succession planning is one of the key responsibilities of a board of directors, it is astonishing

how many of them screw it up. The saga at BP is the saddest thing to have happened to the company in years, and Lord Browne who by any measure is one of the most successful businesses leaders of his generation does not deserve the humiliations now heaped upon him.

Contrast that with Sir Stuart Hampson's adept handing-over of the reins at John Lewis, knowing not only that turning 60 was a good time to go but also that the business had a homegrown 40-year-old, Charlie Mayfield, ready, willing and able to take on the job. …

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