Double Trouble in Bursting Bubbles; City Comment

The Evening Standard (London, England), May 20, 2005 | Go to article overview

Double Trouble in Bursting Bubbles; City Comment


Byline: ANTHONY HILTON

THOSE loud pops you may have heard in the City and West End this week were two investment bubbles bursting.

In the West End, investors were wising up to the fact that only a few hundred of 8000 hedge funds have the expertise to justify their fees and deliver value over the medium term. The pursuit of absolute returns in investment is turning out to be harder than it looks, and there are good reasons why many conventional investments deliver what by historic standards are low returns.

In the City, they were waking up to the fact that few of the 50 or so onemanand-an-oilrig exploration companies that have recently floated on AIM will ever find oil. There is a reason why BP, Shell and Exxon Mobil find so little of it these days.

The easy stuff has already been discovered. Oil may, as some predict, be heading for $100 a barrel but that's no good if you can't find the stuff.

There are remarkable similarities between the two bubbles, but perhaps that should not be a surprise because investors in both cases allowed greed to override common sense. They were far too willing to believe the promises of a pot of gold at the end of the rainbow. They had a touching confidence in the skill of the promoters, based largely on the promoters saying how skilful they were. They forgot that if something sounds too good to be true, it probably is. And they were fooled into believing that because in both cases there is a hard core of very talented people striving to deliver value, everybody seeking to raise money must be similarly talented.

In fact, many honest but less talented people saw that, in these strange conditions, people would throw money at them. So they held out their hats and, probably to their astonishment, found them filled to the brim. The shakeout in oil stocks should be the more brutal because until the businesses find oil, they are really worth nothing and once they find oil, they still have to work out how to finance its extraction without giving away most of what they have found.

With hedge funds, it is rather different because although much of the industry has had a poor year, only a small minority devoted to a specific strategy have got into noteworthy difficulties. Not only are the others untroubled, many would welcome a shakeout because it would remove the weaker players and throw up asset-pricing anomalies from which they might hope to benefit. …

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