Passing through the eye of a needle

Private equity firms have been squirming in the limelight. Paying less tax than your cleaning lady when you take home millions was never a strategy for scoring opprobrium from the great unwashed. Bad press was ever a problem.

Private equiteers indeed need better PR. But they have had a few trumps to play. For a start, there's a decent case to be made for the economic gains private equity firms make: they are drivers of corporate efficiency. They often invest for the long term. And rarely, are they the asset-stripping vultures Britain's union leaders would have them to be.

But hedge funds...

According to an article in the Guardian, Hedge funds deserve far more scorn than private equiteers. The top 25 hedge fund managers, as Alpha magazine points out, took home an average of $570 million dollars last year. Ergo, implies Julia Finch, they are the real bad guys.

Stopping short of a Marxian critique of capitalism itself, I'm pretty sure the Guardian are wrong on this one. Hedgies may well earn the real mega bucks, but the reason why private equity chiefs are deserving of more scorn (if any) is the fact that private equity has a far more direct impact upon employment and the welfare of a great many workers (one in five in the UK).

Private equity firms have (admittedly rarely) destroyed pension funds and aggressively cut jobs - and for those reasons they bare scrutiny. But the only identifiable crime of the hedge fund manager seems to be that they earn lots. Finch makes no effort to deploy a more sophisticated argument -- as she may well have done -- about the threat unregulated and maverick fund managers play to financial stability. Instead it just boils down to bashing the rich.

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The biggest funds? Banks.

I've only just had a chance to have a read through Friday's Economist. Buttonwood reckons investors in private equity firms and hedgefunds are being strung along. Point in case: pension funds, who on the one hand are suffering in aggressive private equity buyouts and on the other, are paying high premiums to invest in the very private equity industry which so damages them.

Pension funds are suffering. Though not, I suspect, as much as others may do in the future. The real patsies in this game of liar's poker, are going to be the banks. At the moment banks are sitting comfortably - even though they have lost out in the primary loan market, the fees which come from dealing with hedge funds are very lucrative.

But banks are losing touch...

The division between banks and hedge funds is becoming artificial. Look at Alpha magazine's list of the top six funds. As the NYT Dealbook points out, the biggest are banks. Traditionally, of course, it's the hedge funds that provide so much liquidity in the market. They're risk takers: creative, flexible and willing to swallow the market's more toxic products to spin a quick buck. Should banks be doing the same?

For are start, the banks are not as good at it as the funds are.

But more worrying still, the banks are the ones loosening covenants and introducing more risk into the market, convincing themselves that they wont be holding any of it anyway. And yet their involvement in secondary markets is huge, try as they do to ape the funds. Imitation may well be the sincerest form of flattery, but the banks seem blind to what they're exposing themselves to. That, or they just don't care.

Banks have survived financial crises in the past for one good reason: their market positions were small enough to be quickly liquidated when trouble hit one of the big funds. They could get out, while the funds were trapped by their own huge bets. That obviously wouldnt be the case anymore...

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ICMA conference Berlin

I'm at the ICMA annual conference today and tomorrow in Berlin, so expect some really exciting posts. The scheduled talks for these things rarely throw up anything controversial, but often there's a fair bit of gossip to be had from delegates.


The programme this year seems to be very regulation heavy - not suprising given the noises coming from some EU governments recently. It's also worth noting that just after the weekend G8 leaders are going to be meeting down the road in Heiligendamm, where --alongside climate change, the African AIDS crisis and peace in the Middle East-- the assembled ministers will be tackling hedge funds and systemic risk. Woop!

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