There seems to be now an almost unending number of these funds crowding the waters of the investment markets, and although others are often melting away, they seem to be significantly outnumbered by the new arrivals. These entities come in all shapes and sizes and behave in many different ways bobbing around in their unregulated waters. Each however, carries a risk with it and can represent a serious potential hazard for unwary ships’ masters trying to chart their way through these dangerous waters.
Last week I made reference to the risks of complacency in this area and this was been perfectly illustrated in the past few days by the announcement of the Amaranth Advisors Hedge fund which has some $7.5 billion under management. Its founder Nicholas Maounis revealed to his unfortunate investors that its main funds were now down 35% or more this year in the wake of losing a substantial bet against the price of natural gas which of course has fallen most recently. Nor are they alone as both the US and Malaysian regulators are investigating Aeneas Capital Management which appears to have lost some 60% in Malaysian stocks in one of its funds and earlier the MotherRock Energy hedge fund announced that it was closing down and that investors would not see any of the original investment back. Dangerous waters indeed.
The result of this will be to renew the calls for regulation of this dynamic but potentially toxic $1,200 billion industry.
Regulation, of course, will just drive such operations further off shore and will do little to assuage the demand and in fact, it could even add to their attraction as being the financial equivalent of “forbidden fruit”.
However, having underlined the dangers I would be irresponsible to not mention that there are also many responsible and well managed hedge funds whose risks are well controlled and constrained. The term Hedge fund does not necessarily have to equate to high risk. However unwary investors attracted by the siren cries of greed will take little time to properly understand the process, risk profile and charges of their fund. Failure to do so would at least be foolish if not even negligent. Investing in the Harry Potter School of investment management is rather stupid – “it’s very clever, but I can’t tell you how it works – it is a secret!”
If however we are to see markets over the next few months, be rather volatile, not unknown in the autumn, and the indices make heavy weather of making any positive progress, then it is likely that it is to be this type of investment structures that are more likely to benefit than traditional long only managers.
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Another old story came back again last week with the FT Markets section headline referring to “US regulators swoop on London”. The US has had a recent history of exporting its policies and controls beyond their normal dominions, as has been illustrated by the extradition of the Nat West 3, as well as certain taxation and regulatory issues. One particular concern has been that of the influence of the onerous reporting requirements of the Sarbanes-Oxley legislation in the US that could impact on UK listed companies if the LSE were taken over by a US exchange (with NASDAQ currently having a significant holding). Assurances were recently received from the Treasury that this would not be the case and that the LSE would be ring fenced in any such deal, It was thus of some concern that the very next week US regulators came into a leading UK auditor under the auspices of the S-O requirements to extract required information. The US won its independence on the line of “no taxation without representation” – perhaps we should respond with “no investigation without representation”? Even most Americans now see the legislation as being unnecessarily onerous and as having little effect other than to increase costs. As a knee jerk reaction to the huge corporate scandals like Enron, it has achieved little and I suspect may go down as the financial version of our own useless Dangerous Dogs Act.
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Hank Paulson’s (US Treasury Secretary) current visit to China illustrates well the benefit of having someone with the experience and aptitude of managing international relationships - diplomatically. After years of rather frosty relations between the two powers when Mr Paulson’s predecessor, Mr Snow seemed to hector and lecture the Chinese on how to run their economy, it seems that the Americans now have someone that the Chinese feel they can do business with. Even President Hu Jintao welcomed him as an old friend (the definition of which appears to be visiting China some 70 times) and no doubt Mr Paulson will be highlighting the benefits to China itself of reforming their economy and currency and not focusing on the any imbalance and unfairness that certain more protectionist US politicians may be bleating about (remember also that we have mid term elections coming up).
If he is able to charm the Chinese to continue and even advance their reforms then this will provide some succor to those seriously concerned about some of these global imbalances.
And finally……….a Selkirk man who has the pleasure of owning an early rising, full volumed and thoroughly enthusiastic cockerel is being threatened with an ASBO. So how do you explain that to a chicken? Anyway shouldn’t it be an ASCROW?
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management, a division of Killik & Co