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Hedge funds, like cash gifts from Italy, carry a whiff of dangerous sophistication

Hedge funds, like cash gifts from Italy, carry a whiff of dangerous sophistication

18 March 2006

12:00 AM

18 March 2006

12:00 AM

‘Pushing money into offshore hedge funds is not the Labour way,’ a left-wing MP commented last week on the savings habits of Tessa Jowell’s estranged husband, David Mills. Since this issue includes an Investment section, readers may be anxious to know whether putting money into hedge funds is or is not the Spectator way. But I think I must pass that buck to your financial advisers, and offer nothing more than words of caution.

Hedge funds have had something of the night about their reputation ever since George Soros’s Quantum Fund harvested £1 billion from the speculative attack which drove the pound out of the European Exchange Rate Mechanism in 1992. We should in fact be grateful to Soros for forcing that crisis, since it made possible a decade-long resurgence of the British economy. But ever afterwards funds like his were associated in the public mind with sinister operators taking dangerous swings at the markets, often using borrowed money and complex ‘derivative’ trading instruments — which increased the profit potential if they got it right and the risk of financial mayhem if they got it wrong, as happened when the US hedge fund LTCM collapsed in 1998.

Nowadays, however, the global hedge fund industry is so big — more than £600 billion in 8,500 funds — that generalisation is almost impossible. Some funds pursue a ‘global macro’ strategy, betting on big trends; others look at specific sectors and rely on a ‘long/short’ approach, which means buying things they think will go up in value while selling things — before they’ve actually bought them — they think are going down. Some funds welcome ‘retail’ investors, others require a minimum £100,000 stake and a personal introduction. According to my man rootling through the bins in Hedge Fund Alley (which runs from Mount Street to Jermyn Street), London’s hedge fund operators range in style from establishment grandees with impressive track records such as Crispin Odey to ‘garagistes’ punting from their home computers. Many of the latter go quietly bust, so if your neighbour starts babbling over the fence about his unbeatable long/short technique, don’t write him a cheque.


A couple of other health warnings. First, the authorities on both sides of the Atlantic are clearly worried not only about the ‘systemic’ risks of a major crash in the hedge fund sector but also about the paucity of information provided by funds to their investors and the danger of market distortions caused by their aggressive trading in cahoots with investment banks. Secondly, bear in mind that although you might make an unusually high return on your spare cash by putting it in the right fund, the people who manage the fund will take a fat slice of the profits before they pass any to you, and will not take a slice of your losses if their alchemy goes haywire.

The managers’ spectacular personal earnings ring the loudest warning bells. I’ve noticed recently that even the richest bankers I know speak with awe of the spending power of the big hedge fund players (‘They’re buying New Zealand,’ I overheard the other night). Philippe Jabre, former ‘star trader’ of a London-based hedge fund called GLG, is said by the Sunday Times Rich List to be worth £200 million; he and GLG have just been fined £750,000 each by the FSA after an investigation into their dealings. Philip Beresford, author of the Sunday Times List and doyen of wealth detectives, tells me that hedge fund managers’ fortunes are very tricky to put numbers on, because so many prefer to remain in the shadows; nevertheless he spotted a dozen new ones last year in the £50 to £100 million range. I’m not suggesting that there is anything intrinsically bent in making so much money so quickly, any more than there is in receiving cash gifts from friends in Italy. It just carries a whiff of what you might call dangerous sophistication.

Rail rage

The number of physical and verbal assaults on railway staff has more than doubled in the past five years, and a high proportion happen in the early evening when tired commuters are trying to get home. Outrageous fare rises this year have no doubt provoked a further blip in the statistics: I would cheerfully have biffed GNER chief Christopher Garnett when I realised I had to pay £83.50 for my homeward journey to York on Thursday evening. And I felt some sympathy when I read that 57-year-old Dr Mike Mitchell is to stand trial in July on charges of common assault and offensive behaviour after allegedly tussling with a dining-car steward while trying to disembark at Peterborough. I felt a lot less sympathetic when I discovered that Dr Mitchell is the director-general of railways at the Department for Transport, and thereby the man responsible for so much of the irritation which passengers too often feel inclined to release on rail workers.

The problem is a circular one. Because the public is so swift to anger, staff at stations, airports, banks, council offices, hospital reception desks and anywhere else the public finds stressful are trained to respond like automata, parroting standard phrases and rules. But that only makes matters worse when what is needed to make the customer happy is a touch of humanity and initiative. So it was when I reached York on Thursday: weary, cold, late for a meeting at home, I was rushing along the platform when I realised I had left a suitcase on the train. I rushed back; the door was about to close; I asked the train dispatcher to hold for the few seconds it would take me to dart on and retrieve the bag. ‘Sorry, mate,’ he blew his whistle emphatically, ‘It’s a safety issue.’ My belongings slowly accelerated past us towards Edinburgh.

Many travellers would have let rip immediately, offering vivid suggestions as to where this jobsworth should stick his whistle. As to how I might solve the problem, he told me to ‘try the office’ — where a brisk woman told me to write down the details and warned me that company rules strictly forbade any intervention in matters of lost property. My temper was rapidly coming to the boil, but I filled out the form anyway. ‘Right,’ she grinned, ‘Leave it to me.’ Late that evening she rang to say the bag was safely with her: she had spirited it off the northbound train at Darlington on to a southbound one back to York. When I collected it I wanted to hug her, but that would have constituted assault. So I gave her a box of chocolates instead.


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