You could walk around Mayfair all day and not notice them. Hedge funds don’t — can’t — advertise. The most you’ll see is a discreet nameplate or two. An address in Mayfair counts in the world of hedge funds. It shows you’re serious, and have the money and confidence to pay the world’s most expensive commercial rents. A nondescript office no larger than a small flat can cost £150,000 a year. Something bigger and in the style that hedge funds like (glass walls, contemporary furniture) can set you back a lot more. It’s fortunate therefore that hedge funds don’t need a lot of space. Two rooms may be enough: one for meetings, for example with potential investors; one for trading and doing the associated bookkeeping. Some funds consist of only four or five people. Even a fairly large fund can operate with twenty or fewer.
These small organisations control substantial amounts of capital. If a hedge fund manages less than $100 million it isn’t seen as a big player; $1 billion is quite commonplace. The capital managed by the world’s ten thousand or so funds amounts to around $2000 billion. (Hedge funds don’t have to divulge the details of their finances and operations, so no one knows the exact numbers.) About a fifth of this money is managed by funds based in London, and two fifths by those based in the US, mostly in New York and its upmarket suburbs, especially Greenwich, Connecticut.
The start of Donald MacKenzie’s excellent article on hedge funds in the London Review of books, which in general has done a good job of providing background articles on the credit crisis in the past few months. Though at the start of the current crisis in late september/early October hedge funds were portrayed as the villains of the story, they’ve now seem to have been largely forgotten. The crisis is now reported on as if it were a natural disaster, something beyond the control of humans, which governments and banks are manfully trying to containt. Any residual populist anger is limited to the bank managers and market specialists which earned such huge bonuses for what now seems very little work or result, with the poor old shareholder as their victim.
What’s conveniently lost in the story is the role shareholders in general and hedge funds in particular played in creating this crisis. It was after them after all who egged on those overpaid bank managers, CEOs and financial wizards to take ever increasing risks to make ever greater profits for them. Yes, it is risible that even managers of failing companies are paid millions of euros in bonuses, but that’s small peanuts compared to the limitless hunger of shareholders for a quick profit.
A local example is the story of ABN AMRO. This bank, one of the three biggest in the Netherlands (the others being ING and Fortis) had been under shareholder pressure to perform better for years, preferably by merging with another bank or selling off some of its subsidaries. Things came to a crisis last year, when a hedge fund called TCI (The Children’s Investment Fund Management) challenged the board of directors directly to split or sell the company to the highest bidder. The response of the
board was to seek a merger with Barclays, a bidding war with a rival group of companies (Royal Bank of Scotland, Fortis and Banco Santander) erupted which the latter won, but not before ABN had sold off some of the targets this group was particularly after. Billions of euros were wasted in this fight, only for several of the companies involved to end up in deep trouble this year. Both ABN AMRO and Fortis have been nationalised by the Dutch government, while the Royal Bank of Scotland had to be rescued by the British government, in what both insisted was not a nationalisation but just looked like one. Without the pressure from TCI this costly takeover fight could’ve been avoided and AB, Fortis and RBS would’ve been in a much better position now.
That’s the problem with hedge funds and shareholders in general. They’re parasites with no stake in the companies they control. The economy 101 idea of shareholders as investors in companies providing them with the capital to expand or set up their business has long been obsolete. The vast majority of shares is traded between third parties, with the company receiving no money at all from them. For the shareholder the only issue is whether or not their share will make a profit in the short run and to achieve that they’ve egged on companies to take greater and greater risks. HEdge funds in particular are dangerous because there’s so little public oversight of them. A handful of people in control of billions of euros, pounds or dollars can make decisions that will make or destroy companies, make thousands of people unemployed or destroy the economy of a small or not so small country. They’re fundamentally undemocratic and need to be abolished as a first step to take public control of our economies.