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

‘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.