An unexpected benefit of Gordon Brown's ban on short-sellers of shares is that the hedge funds appear to be shafted.
The 'hedgies' are rather pathetically complaining that the ban on short-selling means that their business model is broken.
Well, if that's the case, and the hedgies' business model depends on short-selling, it just shows what a crummy business the hedge fund business is.
Of course the short-sellers say that they are only the messenger - bringing a message that a share is overvalued.
However that's only part of the story. The only-too-common result of their message is that short-sellers pile into the target company like a pack of hounds devouring their prey, and the sheer size of the combined short-selling drives the targeted company to destruction.
When the
The short-sellers' behaviour was so arrogant it was comic. To have so little care for the survival of the system in which they operate was so anti-social, so mindlessly destructive, so oblivious to the consequences of their actions, that you realise these people are a little mad.
In his book: Cityboy: Beer and Loathing in the Square Mile, Geraint Anderson points out that a lot of these traders get recruited by the City financial companies because they appear to be people who were bullied at school.
So intent are such people in getting their revenge on society, so determined are they to buy some expensive status symbol to prove to those who bullied them that they have made it, that these damaged people will go to any extreme to make their market trades.
Now, it appears, the hedgies are having their worst year since records began which was 1990. Hedge funds are going out of business, and investors in hedge funds are demanding their money back and, in some cases, not getting it.
A number of hedge funds including Amber Capital, Cheyne Capital, the Falcon Relative Value Fund of the Gulf International Bank, and Absolute Return Partners' Millenium Wave, have said they will not return investors' funds for the time being.
Last week a number of hedge funds closed their main funds, including: MKM Longboat, Powe Capital, Endeavour,
If Gordon's ban on short-selling has the knock-on effect of wiping hedgies from the face of the earth, will it be a good thing for the earth or a bad thing?
Need I ask?
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Comments (5)
Actually short selling had little to to with HBOS' share price decline. Only about 3% of HBOS shares were out on loan (i.e. shorted) in the week before the Lloyds bid. It was long investors selling up, knowing HBOS did not have a viable business any more, that caused the decline.
Posted by Keith | October 3, 2008 8:01 AM
Posted on October 3, 2008 08:01
That's interesting Keith, thanks, but leaving aside HBOS it does seem to be the Hedgies who are complaining most about the ban on short-selling.
Posted by David Manners
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October 3, 2008 10:35 AM
Posted on October 3, 2008 10:35
Is the ban in place to stop "naked" short selling? (shares are not on loan at all - the gamble is to only buy them later on)
Posted by Rk | October 3, 2008 12:09 PM
Posted on October 3, 2008 12:09
My understanding is that short-selling is temporarily illegal whether you've borrowed the shares you're shorting, or whether you haven't.
But, of course, it's only been made illegal to short-sell the shares of a defined number of financial institutions of which a list has been issued
Posted by David Manners
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October 3, 2008 1:09 PM
Posted on October 3, 2008 13:09
I've followed the rise to prominence of the hedge funds with some interest, because I never quite understood the business model. The thing that first confused me was that they were called hedge funds, implying that were making paired investments that would ensure they couldn't fail to make money - the old 'Can't fail' investment scam.
So I looked a bit further and it turned out that the thing that was exciting about hedge funds was the high returns they offered due to their 'aggressive investment strategies'. I looked a bit closer at that, and it turned out that what this meant was 'investments that were too risky for a properly regulated and run bank to consider'. (I remember someone telling me that one hedge fund was investing or maybe buying options on server rack space near Wall Street, because of the local demand for computing power).
Still a bit confused I looked into how one invests in a hedge fund. Well, you had to be rich and probably you had to be invited - this wasn't for the likes of us. Then there were the charges schemes, which made zero-interest Swiss bank accounts look like a high-return option. These funds took '2 and 20' - 2% of your capital each year for the privilege of investing with them, plus 20% of nay profits they made with your money. And you were locked in to these funds, as David said.
So, to summarise:
These funds misrepresented themselves (hedge positions that weren't taken)
Their investment strategies were so risky that even Wall Street's most buccaneering types weren't much interested
Terms for investors were onerous, to say the least - until it all blew up, the fund managers were at least getting their 2% charges every year, regardless of fund performance
The funds were presented as a special deal for privileged insiders (always a clue)
Really, how big does a scam have to be before a regulator reacts? Because on current performance, I think I'd have a good chance of launching a fund that invests in a nice little portfolio of properties to which I have exclusive access.
Obviously I can't say any more here, but if you'd like to send me a registration fee of say, £1000 up front, the balance when the fund opens, care of my bank in Switzerland, then we're on. If you're interested in the properties in the portfolio, obviously I can't really say but think L****n Br*dge, N*ls*n's C****mn, the Ho**ses of P*rl**m*nt and other such landmark investment opportunities....
Posted by Luke | October 3, 2008 3:18 PM
Posted on October 3, 2008 15:18