Two years there was a music festival at Knebworth, in central Britain, that was very different. At “Hedgestock” 4,000 hedge fund managers and investors paid US$1,000 a ticket for a weekend of rock’n’roll, champagne, laser clay pigeon shooting and seminars on arcane aspects of how to make even more millions. Some wore beads as part send-up, part veneration of Woodstock, 1960s hippies and “hedgies” bound by the bond of anti-establishment love of liberty, as if the aims of getting stoned and making a fortune gambling in unregulated financial markets were curiously united. The Who played out the event, with proceeds going to the Teenager Cancer Trust.
“Hedgies” were the cool face of capitalism. This year, a rerun of Hedgestock would be pilloried and rightly so. Oil prices are spiraling higher and the plight of stricken banks, property companies and housebuilders is made more acute because of hedge funds’ aggressive speculation. Late last month there were fresh fears that the Western financial order simply could not cope and global stock markets reeled. Hedge funds are emerging as one of the triggers of a first order crisis.
The scale of speculation is eye-poppingly huge. Since Hedgestock, hedge funds have become ever more important. The worldwide industry manages US$2 trillion in assets and a leading hedge fund manager told me they are only a third into their growth cycle — another US$4 trillion is to come. One cynic mocked that the only unifying definition of hedge funds is that they are vehicles to enrich the people risking others’ money; with a 2 percent management fee and a 20 percent share in any investment profits, they certainly do that.
Hedge funds are rich enough to attract any of the great names in investment management and investment banking. New York has more than 120 hedge funds managing more than US$1 billion each, with London running it a close second with more than 80, mainly based in the exclusive areas of Mayfair, Knightsbridge and Belgravia. Some 200 hedge fund partners in London make US$40 million a year, but for the partners who do well, annual earnings can be many times higher. In 2006 Nathaniel Rothschild made US$240 million from his Atticus Capital, while last year George Soros’s Quantum fund returned 32 percent and netted him US$2.9 billion.
Their pitch to investors — from insurance companies to company pension funds, sheiks, Russian oligarchs, the British aristocracy and anybody with sufficient cash — is simple. They set out to make a return of 30 percent a year any way they can in no-holds-barred, hyper-aggressive financial gambling. They take positions in any share, financial instrument or commodity you can name. When they were small you could argue they were a justifiable irritant, challenging and punishing governments and companies alike, who had got themselves into unsustainable financial positions. But now they are becoming the mainstream, degrading the operation of capitalism, turning it into a casino, reducing people’s lives to the chips.
It is fashionable among commentators to regard the UK’s Labour government as the epitome of uselessness, but occasionally there are signs of life. HBOS bank, Britain’s largest mortgage lender, and Bradford & Bingley bank have come under organized attack from hedge funds as they try to raise money from their shareholders. Their shares were being sold to force down the price before being bought back — “short-selling.”
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