Mention hedge funds to most people, and you could well have them spitting blood. The conventional – and ill-informed wisdom – is that those nasty hedge funds, in cahoots with the banks, more or less brought the western world to its knees. But that is all rather unfair on hedge funds.
Admittedly, they are, like the law and The Ritz, open to all – i.e. they are open to all who have several million to spare and can afford to take advantage of the expertise they offer, but in principle you and I can do what hedge funds do and if we get it right, we, too, would be quids in. That is, of course, a big if. For the fact is the hedge fund managers put in a hell of a lot of work to spot winners – and losers. And it is the profits they make on spotting the losers which seems to upset everyone.
That is odd, because no one objects to anyone identifying a stock it believes is undervalued and buying up that stock in the belief that in the future it will gain in price. It so happens that hedge funds often do the opposite: they identify stock which they believe is overvalued and then short-sell it. Moralists might claim that such action profits from failure, but I can’t see it at all.
I began to understand a little more of what hedge funds do when I heard an interesting piece on the radio by the guy who made a pile for his hedge fund by spotting that Enron was a wrong ’un.
In the course of his work, he was going through the published financial information of a variety of firms and something about what Enron had published didn’t add up. So he concentrated on Enron and decided – quite rightly as it turned out – that Enron was just another house of cards. So he bet that the house of cards would come tumbling down and that the stock would be worthless. It isn’t, of course, quite that simple, and a fair degree of luck is involved in the timing. But, broadly, that is what hedge funds do (and I suspect a large amount of the hostility towards them is based on the fact that we can’t get a piece of the action.
Naturally, not all hedge funds are a success and that is part of the risk taken by those who agree to lend to hedge funds. There was the famous case a few years ago (so famous, I can’t even remember the name of the fund) which had to be bailed out in order to ensure the whole system didn’t collapse, but I assume that was the exception which proved the rule.
I mention this because I came across and interesting piece in the Telegraph the other day about how a number of hedge funds have done their homework and expect China to come crashing down sooner rather than later. Naturally, there is any number of Cassandras who, some gleefully, predict doom and disaster several times a day at the drop of a hat, but what I feel is significant is that in this case – to use a phrase usually employed elsewhere – this isn’t personal, it’s business. Hedge funds who do think China is going to go tits up sooner rather than later and are prepared to act on their analyses are not interested in making a political point. They are neutral.
It is common knowledge that a massive price bubble exists in the housing market in China’s coastal cities and bubbles always – always, always, always – burst. Always. Every so often some idiot comes out and foolishly pronounces that ‘boom or bust’ has been beaten, and the announcement is always followed pretty soon by the very bust which was never again going to happen.
The problem with China is that it is not playing by the ‘rules’ (if, indeed, there are any rules in the capitalist game of beggar my neighbour.) So its factories are working flat out,
but because the value of the yuan is being kept artificially low, the goods they produce are cheap, cheap, cheap. We buy them cheap and feel prosperous, and China sells shedloads and feels successful (as, I’m sure, does the couple left). But it can’t go on forever.
I also read recently that China has built any number of ‘ghost cities’ just to keep its workforce occupied. They are called ‘ghost cities’ because no one is living in them. What compounds the problem is that with all the money it is making by selling cheap goods to the western world, China has been busy buying up whatever assets it can – from agricultural land in New Zealand to rare mineral mines in Africa and, most pertinently, sovereign debt in Europe. In the past few days, Portugal, which is deep in the shit and issued more government bonds to raise more money, got a pass because good old China came along and bought a great deal.
Of course, anyone – including China – who buys such bonds always runs the risk that the seller will eventually go bust and be unable to honour them, but that’s the name of the game.
But the hedge funds have done their homework and many of them believe the writing is on the wall for the present round of Chinese good times. They could well be right.
The real problem is that the west is banking on a prosperous Chinese middle class buying up the goods and services it produces to help us out of the current slump. If China does go to the wall, it won’t just be the Chinese middle class who suffer.
. . .
A few years ago, the Economist did an experiment: it choose a number of shares in three different ways. First it asked acknowledged ‘stock pickers’ (the kind of guys who choose which stock your investment fund should invest in) to make their choice. Then it simply picked stocks which tracked the FTSE. Finally, it took a pin and, with whoever was wielding the pin suitably blindfolded, stocks were chosen at random. A year later it looked at how those stocks had performed.
Well, you know exactly where this is going: the stocks picked at random did better than those picked by the professional stock pickers, which did more or less as well (or badly) as those which tracked the FTSE. Well, it’s a good anecdote and one which should be taken seriously, but it has to be said that there are several variables here which make the tale rather less shocking than it might seem. (OK, ‘shocking’ is laying it on a little too thick, but you know what I mean.)
First, there is the element of luck, which simply cannot be quantified. Then there is the ‘expertise’ of the stock pickers, which on the face of it rather undermines what I have written above. But still, it does rather put all that hi’falutin City stuff in its place.
. . .
Make a note in your diary: this Friday (January 21), a certain Anthony Charles Lynton Blair has a second date with our very own Chilcot Inquiry, which is looking at why Britain under Blair decided to invade a sovereign country without UN authorisation of any kind and got away with it. It will be his second appearance, and it seems he has been
recalled because of discrepancies in the evidence he gave the first time. This morning’s papers carry report that in previously classified evidence Blair’s Attorney General Peter Goldsmith admitted to the inquiry that he had been ‘uncomfortable’ with Blair’s interpretation of his legal advice on the legality of invading Iraq. Given that we in Britain have made polite euphemism a way of life, for ‘uncomfortable’ read ‘after what I told him, I didn’t know what the bloody hell he was playing at’.
For the record I think, and have always thought (though I admit that is a very easy thing to say now, but – honest, guv’ – it’s true) that Blair was a nine-bob note (a nine dollar bill or a nine euro note – you get the drift). I have also thought that he was and is a sandwich short of a picnic, although quite in what way I couldn’t tell you. No doubt he will try his usual trick of stating the obvious at length and with great authority, thus seeming to say something while, in fact, saying nothing whatsoever. And, of course, the real irony is that even if things were to do against him drastically, it wouldn’t matter. The moment has gone. He is yesterday’s man and of no importance anymore, so what would be the point of pursuing him, as some want to do, in the International Court?
For the record and according to the website Iraqbodycount between 99,374 and 108,492 Iraqi men, women and children have been killed since the invasion in 1983, rather more than were dying when Saddam Hussein was in charge. Blair and others would perhaps claim that they wanted to rid the world of a dictator and bring democracy to Iraq. To which I say, why just this one dictator and just how patronising, not to say neo-imperialistic, to insist that the rest of the world should do as we in the west say and adopt our way of governing. (I like to think in terms of self-determination rather than ‘democracy’ – ‘democratic’ Belgium has been without a government for ten months; and if the majority in a country are in favour of, say, a theocracy, who are we in the west to object?)