The London Paper – 31 Oct 2008
When I attend dinner parties these days and am forced to admit that I used to be a City boy I often find myself facing a hideous tirade of abuse as all the current woes of the world are laid squarely at my feet. Indeed, henceforth I am considering pretending that I used to be a torturer, a biological weapons manufacturer or perhaps even a traffic warden such is the intensity of the rage I receive. However, there is one group of people who are even more reviled than bankers: hedge fund managers. This sentiment is why most decent folk will shed copious tears of … unbridled joy after a whole bunch of these clowns lost up to €30bn on a bet that went horribly wrong this week.
People despise hedge fund managers for two main reasons. Firstly, during the good times they made such disgustingly vast amounts of cash that even we stockbrokers felt like two-bit losers in their presence. Secondly, some of their number contributed to today’s economic crisis by spreading false rumours suggesting various banks were about to go bust. They did this because they could profit from the ensuing share price weakness since they can ‘short’ shares e.g. sell shares they have ‘borrowed’ with a view to buying them back at a cheaper price once they’ve fallen in value. The malicious toe-rags involved in this scam didn’t give a monkey’s that their actions could help bring about a global recession that causes untold misery because they would make a fast buck as the world fell apart.
Anyway, this week quite a few of these boys came a cropper as a result of shorting shares in Volkswagen. Unfortunately for these buffoons Porsche announced on Sunday that it had increased its stake in the company from 43% to 74%, which combined with another large stake held by a different company, meant only 6% of the shares were tradable on the market. Because over twice that amount had been borrowed by short sellers a buying frenzy began as they tried to cover their positions (e.g. acquire the shares that they had temporarily borrowed and sold on so that they could return them to their previous owners). This pushed the price of VW shares to €1005 at one point, five times its price on Friday. Amusingly, this made VW briefly the most highly valued company in the world! There is now also talk of many hedge funds going bust … and the laughter of the general populace is deafening.
The main conclusion from this sorry tale is that numerous hedge fund managers are taking preposterously risky bets as they treat financial markets like a Wild West casino. The fact hedge fund managers have a bonus that is mechanistically calculated from their funds’ performance makes many of them take insane punts knowing that the potential financial upside is massive. What is even scarier is that I’ve heard some of these characters are reacting to their funds’ poor performance so far this year and the current job insecurity by taking even riskier punts feeling that they may as well bet the house to make up for losses, especially as a P45 might be just around the corner. There may be trouble ahead …