Billionaire hedge-fund managers didn’t cause the crisis, so tougher regulation would be a mistakeby Jonathan Ford / June 22, 2010 / Leave a comment
Michael Douglas in Wall Street: bankers, not hedge-fund managers, are the villains
Hedge funds are the bogeymen of international finance. In the past two years they have been denounced for destroying Bear Stearns and Lehman Brothers, taking the entire financial system to the edge of a precipice. They now stand charged by European politicians with threatening the very existence of the euro. Ministers talk openly of a destructive hedge-fund “wolfpack” and call for legislation to curb it.
Regulators have long worried that a hedge-fund collapse might damage the financial system. Their ability to move markets has infuriated politicians: Malaysia’s former prime minister, Mahathir Mohamad, once called the hedge-fund manager George Soros a “criminal” for speculating against Asian currencies. When hedge funds shorted the French franc shortly after dumping Britain out of the exchange rate mechanism in 1992, French finance minister Michel Sapin called for speculating traders to be guillotined.
It is easy to see why these private investment funds—which now number about 9,000, control a staggering $1.6 trillion of investors’ money, and dominate great chunks of the global financial markets—attract such attention. Their freedom to take big positions in securities round the globe endows them with a glamour that most conventional fund managers must envy. And then there is the money.
The famous “two and 20” fee structure (they charge investors an annual fee of 2 per cent of the portfolio value, plus a fifth of any profits they make) has made some of their managers obscenely rich. When the Croesus-like US financier John Pierpont Morgan died in 1913, his fortune was $1.4bn in today’s money. In 2006, three hedge-fund bosses reputedly earned more than $1bn in one year alone. Top “hedgies” are the rock stars of the financial world, their art collections and marriages chronicled breathlessly in the glossy magazines.
But are they the destructive force they are sometimes made out to be? The case for curbing hedge funds rests on the idea that they are reckless institutions whose risk-taking activities imperil the financial system. Yet a persuasive new history of hedge funds, Sebastian Mallaby’s More Money Than God, challenges the assumptions underlying the “wolfpack” charge. At the beginning of the hedge-fund movement, during the stock market boom following the second world war, funds were obsessed with controlling risk—far more so than the modern investment banks that dominate the City and Wall Street. When Alfred Winslow Jones,…