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Are hedge funds the root of all evil?

So, the morning goes on, more dialogue and more debate.

The highlight of the week so far, for me anyway, came with the session entitled: "This House believes that Hedge Funds are the root of all evil?" if nothing else, for the title.

The moderator of the session was Julian Tregoning, a Director with the Bank of New York Mellon, and a very distinguished fellow indeed.

Punchy, charismatic and humorous, Julian introduced our debate by picking on a variety of headlines from recent media, including "Hedge Fund Manager pays himself more than the Queen of England", "Hedge Fund Manager thinks of himself as the King of England" and "Hedge Fund Manager Ate My Hamster!"

All things that would frighten the most mild-mannered person.

He then introduced the panel which included:

  • Gary Aguirre, Principal, The Aguirre Law Firm; Former SEC Senior Counsel
  • Jack Bouroudjian, Chairman, Capital Markets Technology
  • Tim Lind, Managing Director, OMGEO
  • Sean Pairceir, Managing Director, Brown Brothers Harriman
  • Julian Shaw, Head of Risk Management and Quantitative Risk, Permal Asset Management

The debate was meant to be under Chatham House Rules, as in it cannot be reported, but with an audience of around 1,000 SIBOS attendees, and with many press reporters and bloggers in the room, I’m sure some quotes will be attributed.

For example, Chris Skinner of the Financial Services Club said: "is there a difference between American and European atttitudes to hedge funds and leveraged risk, e.g. the US has supported this which is why the US markets are now in such deep water?"

No, I wasn’t on the panel, but that was the question I asked.

The arguments for Hedge Funds being the root of all evil included the fact that they circle like vultures and short stock weaklings.  As one audience member said: "Some say it is the role of Hedge Funds to identify firms wearing the Emporer’s new clothes, but Hedge Funds do not just strip them naked but humiliate and flagellate them". 

Emotive words indeed.

Apparently, Hedge Funds are not transparent, they are unregualted, they have pushed the markets and the leverage model to the limits, and their managers rake in excessive fees far beyond their worth.

But not one of the proposers seemed to say that they destablised the markets, just that they don’t like them very much.

As a result, the opposers put forward more compelling arguments.  In particular, saying that Hedge Funds create more liquidity, smooth out risks, understand their portfolios and the risk in their portfolios intimately, and have been a key constituency in creating the wealth we have enjoyed for the past decade.

The killer punch was probably the comment that it was not Hedge Funds that created derivatives and subprime risk.  It was the banks.  The banks did not understand the risk models however, and the fact that the 1933 Glass-Steagall Act was removed led to banks getting into risks they had no idea they were creating.

It was the banks therefore that messed up, not the Hedge Funds, and can anyone really blame a Hedge Fund for shorting stocks of banks that have screwed up?

The vote was therefore unanimously rejected by the audience, and Hedge Funds are not the root of all evil … just very, very, very annoying, greedy, arrogant and rich.

Then to lunch, and a chat with a few more exhibitors.  There don’t seem to be many bankers around now, but you never know.  When I see one, they all seem to be collecting memorabilia of other banks that they suspect might not be around next year.

After all, a nice towel with Merrill’s, Lehman’s or HBOS’s logo on it must be worth something mustn’t it?

About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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