Asset Manager

There has been a lot of press recently reporting the call from regulators and politicians for hedge funds to have greater disclosure. It has been flavour of the month recently because of the ‘threat’ (as some see it) of the lightly regulated nature of these investment vehicles.

The real question is; Can hedge funds survive if they have to disclose their inner most workings?

I think not. At least not in their current manifestation.

Mutual funds investing the pension money for little old ladies and the masses should be accountable and heavily regulated considering the social impact of a failure of a large fund. Pensioners will still need their pensions despite such a failure, and this won’t go away, so the tax payer would eventually pick up a portion of the bill. In this instance regulation is very good indeed.

The problem I have with the regulators on the hedge fund point is that you can’t have your cake and eat it. You cannot, on the one hand, restrict who can invest in the funds and stop funds advertising and on then on the other ask the funds to give their inner most trading secrets to regulators via disclosure rules.

The issue, in my opinion, is not that regulators are worried about rich people losing money, it is the fact that pension funds do invest in some hedge funds and they are becoming more institutional vehicles. For accepting pension fund money, certain companies only have themselves to blame for the interest that regulators are showing. Another issue is that the big funds do have an affect on the markets, we all know that, but if a ‘club’ of rich people got together and started investing their money as hedge funds do would they be required to disclose? Look at it this way, where does it end?

The markets are held up as the crux of the ‘free’ economy. Regulators, however, are seeking to uncover the trading methods of people who are successful at playing that market and thus restrict their ability to do business.

Does Microsoft have to give there source code? Does Coca Cola have to give up their secret ingredient, do journalists have to give up their sources for stories and do politicians declare everything they should?

The argument that hedge funds are a ‘threat’ to the stability of the markets is, frankly, a little old school. Look at what we have just witnessed in August, the potential was for BIG trouble and yet the speculative funds were buyers of troubled debt, troubled companies and troubled banks, that, my friend, is an efficient market in operation..

I have been involved with small companies previously and there used to be huge criticism of brokerage companies that operate in that sector, it is risky yes, but it also provides speculative liquidity to the marketplace. If there were not companies and clients willing to invest in that area of the market, there would be no AIM or Plus markets for example. On a scale a thousand times larger, hedge funds provide this speculative liquidity to the markets.

If you over regulate these players and take that speculative liquidity from the markets who will be left to catch the Dow or the Footsie in the next market ‘correction’? Mutual Funds? Pension funds? Central Banks? Politicians?

Somehow, I don’t think so……

It’s always amusing to poke fun at the regulators but it is twice as much fun when industry ‘experts’ add to the cock up.I have always been told that the definition of an expert is ‘ex’ as in ‘has been’ and ’spurt’ as in a ‘drip’ under pressure. This may be a little harsh but when the lunatics are taking over the asylum it’s time to get concerned

On Tuesday October 10th, Europe’s second-largest hedge fund mistakenly exposed its large-scale shorting of shares in Northern Rock, the troubled bank, after a miscommunication with the Takeover Panel.

GLG Partners, a $19 billion (£9 billion) fund manager, told the London Stock Exchange that it had failed to make trading disclosures between September 26 and October 5.

The hedge fund manager blamed “human error” for its lapse and disclosed that it held short positions on more than 3 per cent of Northern Rock stock via contracts for difference. It is thought that up to 50 per cent of Rock’s stock is currently being shorted. In a farcical series of events, it is understood that GLG told the Takeover Panel of its activities on Monday night and that the Panel told it to ‘alert the market as soon as possible’.

I completely understand the Panel’s involvement in the Rock but I can’t understand why GLG thought they needed to declare. Forgive me, but the clue is in the name ‘The Panel of TAKEOVERS and Mergers’. How a short position could be seen as a takeover move is a stretch.

I am aware of reporting rules when certain holding thresholds are reached and reports of holdings over 1% are being submitted regarding the Rock, but on a short? Effectively the position is netted off with a short being offset by the necessity to buy the shares back. So how could this possible come under the remit of the Panel?

This cock-up is made all the more amusing as Sir Howard Davies, the former Financial Services Authority chairman is on GLG’s advisory board….

The problem is regulators have been jumpy about trading in bank shares during recent market turmoil, amid fears of insider dealing. Philip Richards, co-founder of RAB Capital and the biggest shareholder in Rock, last month attacked some rival hedge funds for fomenting panic about Rock and accused the Financial Services Authority (FSA) of failing to regulate trading in its shares.

The FSA has taken just one notable disciplinary action against market abuse. In August 2006 it fined GLG and Philippe Jabre, the former managing partner, £750,000. GLG has also been fined by French and American regulators in the past 14 months.

This reporting farce does highlight, however, that the PTM have some fools working for them who don’t even know their own rules and GLG need to hire guys that have actually taken some corporate finance exams…

Guys, I will help you out for a few shekels….