Author: S Kane

wedded to the markets – seeking my millions, focused on the oil market, a weakness for jazz.

Hedge Funds – The Root of All Evil?

“We cannot forget how in 1997-98 American hedge funds destroyed the economies of poor countries by manipulating their national currencies.” – Dr. Mahathir Bin Mohamad, (former Prime Minister of Malaysia, during the emerging market crisis).

The Hedge Fund industry has come under major scrutiny in the past few years. Blamed for stock market crashes, manipulating the markets and threatened with a ban on short selling, if a scapegoat was needed, they were ‘shortly’ targeted (!). Chargers of high fees and notoriously opaque – people naturally fear the unknown, and an expensive unknown even more so. Nevertheless, as Richard Wilson pointed out in his blog – back in 2007 the head of the Financial Services Authority (FSA) said that:

hedge funds were not the catalysts or drivers of (that) summer’s events.”

Hedge funds trading in the financial markets can increase liquidity and aid price formation. Jed Emerson wrote a great piece at the end of last year taking he argument away from a debate between “good” and “evil” and instead concluding:

“fundamental fund of hedge fund investment strategies, when managed appropriately, may represent an emerging though as yet not realised opportunity for investors to pursue both full,  commercial  rate  returns  and  affirm  relevant  aspects  of  Sustainable  investment practice.”

Although I question the assertion the fund of hedge funds industry is emerging – since in some cases it seems to be retracting, I agree they offer an opportunity for returns and the claim of affirming sustainable investment practice balances the opposition’s argument.

What seems to be a rarely discussed topic is the value the industry provides the wider economy, outside the financial markets. Below I highlight some impressive information, sourced from a great article by Open Europe….

BOTTOM LINE: Job and tax contributions should not be under-estimated.

Benefits of PE / HF Industry to EU Economy

  • Contributed ~ 9 billion (£7.9 billion) in tax revenues in 2008 – could fund the EU’s overseas aid budget for twelve years, or the regional budget for Poland,
  • Directly employ 40,000 people in the EU – 18,000 of whom are employed in the UK (before taking those involved in real estate funds or dependent on the industry)

Benefits to UK Economy

  • €6.1 / £5.3 billion tax income raised in the UK alone
  • Enough to pay for over 200,000 nurses or 165,000 teachers.
  • Tax revenues generated over 2 years could pay for the entire 2012 London Olympics.
  • If the revenues were lost, would take 20% increase in av. council tax bill to make up

SK

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Political Turmoil in Ireland

Geographically, Ireland is a medium-sized rural island that is slowly but steadily being consumed by sheep.” Dave Barry quotes (American Writer and Humorist b.1947)

Got this picture this morning from a friend of mine and think it sums up the situation in Europe perfectly.

To clarify the situation – Ireland has accepted a multi-billion pound bail-out which may trigger a cut in the country’s credit rating. But that isn’t even the worst of it. The Government is threatening break-up with calls for General Election and claims of exiting the coalition from the Green Party. And to increase the amount of political uncertainty, the PM himself is under pressure to quit. From an investor’s point of view the risk is an exit of those in the market. Last Monday, after the announcement, the EuroStoxx closed down 1.2%.

Putting the situation in the context of the “Greece Crisis” – the Ireland bail-out package is 60% of GDP versus “only” 47% for Greece.

INVESTMENT INSIGHT: Watch the Contagion – Exploit

SK

Update since initial draft (29th November 2010)

  • The Green Party have now exited the coalition,
  • Ireland’s Sovereign Bonds have been downgraded (Aa2 from Aa1 by Moody’s)
  • We have seen public disapproval
Market Reaction

The Irish Stock Exchange rebounded by 1.8% from relief senior bond holders will not be forced to take a haircut under rescue package. However, in the bond markets the premium investors demand to hold Irish government debt over the German benchmark bunds remains near record highs after the spread only narrowed by 6bps.

“We are hopeful that a little more calm and a reality will come back to the markets’ valuations,” G finance minister told German radio station Deutschlandfunk.

Irish Public Reaction

Majority (57%) of those polled by Quantum Research for the Sunday Independent newspaper want State to default on debts, believing it cannot support the debt burden it has taken on which would involve annual interest payments of around €5bn over 9 years.

Opposition was taken to the streets with around 50,000 people registering their disapproval of the Government’s 4Y plan to cut the budget deficit to 3 per cent of GDP by 2014.

\”The ECB f**ked us,\” one government official in Dublin was reported yesterday to have said.

With respect to future easing

French economy minister has come out saying the bailout package is sufficient because that will keep Ireland afloat for three years,”

BOTTOM LINE: This all adds to political uncertainty as we approach the publication of an austerity Budget on December 7.

INVESTMENT INSIGHT – Watch the Contagion – Opportunity to exploit the irrationality

Possible Contagion: Portugal remains under pressure – Nouriel Roubini (Economics professor, Chairman of Roubini Global Economics), believes that the Lisbon government should seek a bailout quickly.

Market Irrationality: Lagarde has said the market was wrong to price the cost of Spanish debt at the same level as more risky countries such as Pakistan and Romania.

“Europe is difficult to understand for the markets. They work in an irrational way sometimes,” Christine Lagarde, French economy minister

Second Update (30th November 2010)

Governments fail to allay market concerns of future defaults – historical moves in yields….

Spanish Government 10 Year Bond Yield. Source: Bloomberg