Wednesday, May 14, 2008

Hedge Funds Heroes?

In an amazing turn around hedge funds are now being touted as the possible 'heroes' of the market as reported by the FT.

Having been pilloried by the regulators before the credit crunch for earning too much money and being 'secretive' to being blamed for their 'slap dash' approach to leverage it is all the more amusing that they should be portrayed as the potential heroes of the moment.

The story has been born from the fact that some assets do not, at this precise moment, have a price. Basically if you hold a bunch of US mortgage-backed securities, which are sub prime, for example, you have no idea what they are worth. This is what has lead to the 'death by a thousand cuts' and 'Groundhog day' headlines when the banks have trickled out the news on write downs.. the truth..nobody knows what they are worth.

In rides our hero the hedge fund manager, with balls of steel and a calculator attached to MIT Grads, Harvard scholars and Oxford analysts. The hope is he will come up with a valuation stick a zillion dollars into the bet and save the day....


Personally, I thought that UBS, for example, would be able to afford some pretty serious talent and employ some pretty serious capital. Why would they need a hedge fund to bail them out? These were the analysts that spent some of that valuable knowledge predicting the outcome of the Euro 2008... (I kid you not)

The 'hedge funds as heroes story' eminated from a recent roundtable on hedge funds. Ian Plenderleith, chairman of Brevan Howard's BH Macro fund, said that hedge funds help markets to function properly again by taking their own positions on the pricing of assets.

Mr Plenderleith said: "Where there is a difficulty in pricing assets there is a terrific opportunity for hedge funds whose specialisation after all is to try to reach a view on the values and to back their own judgement with their own and their investors' capital if they think the market has got it wrong and they have got it right.

"By putting their money into markets and backing their judgement it helps to regenerate market liquidity and ultimately to get them functioning properly again. I do not think I would claim that hedge funds are doing that out of a sense of philanthropy or charity, they do it by pursuing profit opportunities for their own clientele but, in doing so, because they are active in markets they are helping them to function properly again and that is a valuable public policy contribution."

When looking at trades I love to hear this talk, we have said time and time again that the volatility in this market is a function of the new instruments and funds. From derivatives to hedge fund managers the numbers involved are mind-boggling and when that money is pointed in one direction few companies, markets, or sectors can resist. If you don't believe me take the case of oil, OPEC said (and frankly they should know) that the oil price has $30-$40 within the price which is pure speculation. Now if the oil market can be swayed the financial sector, for example, has no we saw.

The simple fact is that leverage is available to all. If you download the trading system at and open an account for as little as £10,000 you will have, at the touch of a button, control of up to £1mn (depending what you trade) that's pretty serious leverage if you have $1bn.

'Heroes of the piece' probably not, but talk like this is good... its only a matter of time until the hedgies pull the trigger and I, for one, shall be using my leveraged account to great affect on the ride back up....

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