Are Hedge Funds The Root Of All Evil ?

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I was having a perfectly nice drink with an ex-colleague of mine recently, when he suddenly put forth the controversial proposition that hedge funds were, and I quote, ‘the root of all evil.’

I asked him to elaborate, and summarize his main points below:

Hedge fund managers receive 20% of the fund profits when all goes well, but tend to lose their investors (and hence their jobs) if they underperform. The rewards for winning can therefore be huge, but failure brings with it vicious and rapid punishment. Such massive carrots and sticks, he said, may well incentivize hard work, but they can also result in a willingness to break the rules.

My ex-colleague also claimed that it had only ever been hedge fund managers who’d asked him for inside information. This explains why hedge fund managers are, in his opinion, the principal perpetrators of nearly every bit of market manipulation he’d ever witnessed. He alleged that hedge fund managers were behind various ‘pump and dump’ scams he’d been aware of, and that it would only be these ‘short-term gamblers’ who would bother perpetrating such manoeuvres.

But it wasn’t even this gambit that really got his goat. What he really got upset about were ‘bear raids’ – when groups of hedge funds sold short,and then spread exaggerated rumours that their target companies were facing near-term bankruptcy. Long-only funds couldn’t benefit from this scam because they couldn’t go short but, he claimed, some hedge funds were undertaking bear raids all the time – using derivatives and credit default swaps to make massive profits, while destroying companies and the livelihoods of the less-well-off.

He then took out the big guns, and alleged that the 2008 financial crisis would not have been half as brutal as it was had certain hedge fund managers not done their damndest to help exacerbate the despair that was gripping the markets. He claimed that he understood ex-Lehman CEO Dick Fuld when he stated: 'When I find a short seller, I want to tear his heart out and eat it before his eyes … while he's still alive!'.

Virtually frothing at the mouth, my ex-colleague shouted: ‘They’ve lost people jobs from Bristol to Bombay … they’ve besmirched the reputation of every honest hard-working Cityboy … they’ve turned the Square Mile into a short-term casino and … and … I happen to know that the one I broked to today earned £4.5m last year!’

It was then that I realised what the real problem was. Sure, certain hedge funds have been playing fast and loose with the markets for years, but the most unforgiveable thing in the eyes of this Cityboy was that the hedgies were actually earning more cash than he was! So much for ethics!!

Follow Geraint on Twitter at twitter/cityboylondon

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Geraint Anderson’s novel Just Business is now out in paperback.

Buy 'Just Business' from Amazon

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