HEDGE FUNDS: A CRISIS IN THE MAKING

Author: Abhishek Parasrampuria, Chief Financial Correspondent, The London Globalist

While 78 billion dollars may not get you the world or Robert Downing Jr. in a film, it’s certainly enough to open a lot of doors in a lot of parliaments. The sheer influence an entity controlling such a vast sum would possess is frightening, to say the very least. And when that company happens to be Man Group, the world’s largest publicly traded hedge fund, then it’s a matter of concern indeed.

Now, we’ve all read something or the other about the financial crisis, and the banks which had to be bailed out because they were ‘too big to fail.’ One might think that because a hedge fund does not deal with the public (it only accepts large sums from a few ultra-wealthy investors) it is relatively safer if a few fail as that wouldn’t threaten the bedrock of any economy. Think again.

Ever since Manny Roman was appointed as CEO, Man Group has begun an expansion frenzy, acquiring companies with any strategic advantage and presence, especially in the U.S.A to expand its base and reach. GLG Partners was acquired in May 2010 for $1.6 Billion, which then became the largest acquisition in hedge fund history. Man GLG (now converted into one of the four investment managers of Man Group, the others being Man AHL, Man FRM and Man Numeric) went ahead and acquired Silvermine in 2015. Interestingly enough Man’s trading statement mentioned GLG had a ‘mixed year’ but the January 2015 acquisition of Silvermine would boost the divisions CLO business.

For those of you who don’t know, CLO stands for Collateralized Loan Obligation: A form of securitization where payments from multiple mid-size and large business loans are pooled together and passed on to different classes of owners in various trenches. I’m sure this sort of a financial arrangement rings a bell somewhere and yes, it is not too late to be alarmed.

Man Group is not only limited to Europe and the U.S.A. Man GLG’s largest position is in Japan long-only equity at $10.2 billion. With a global presence, especially in emerging markets, any investment catastrophe made my it’s fund managers would have spill over effects worldwide, at least in those economies which have multiple transactions with the rest of the world; perhaps being North Korea does have some advantages.

Man also isn’t without its fair share of controversy and legal battles. If you’ve heard of the Daily Express, Daily Star or Channel 5, then you’ve probably heard of Richard Desmond: their owner who’s down £20 million, courtesy Credit Suisse and man Group. Mr. Desmond sued Man GLG and Swiss Bank Credit Suisse over a derivative swap he bought in 2007 and had to terminate in 2008 due to the financial crisis. GLG hit back, pointing out that the Media Mogul bought the product from Credit Suisse, which invested in the GLG portfolio of hedge funds, and hence Man Group bears no obligation to Desmond, who of course did not take this statement very well. The case was attracted a lot of attention and was eventually settled out of court but I’ll like to draw your attention to the fact that ultimately a hedge fund’s actions, decisions and results do have an impact on the general population. If Mr. Desmond had been a producer of specialised medication for a very small market he would not have been able to survive this loss, which probably would have led to the termination of his business. What then of his patients?

I am not saying that all Hedge Funds have evil practices and should be abolished but we do need to increase their regulation because the present laws are not adequate enough to overlook their
governance. Man Group is a publicly traded hedge fund and is sufficiently large for any of its transactions to arouse interest and speculation. However, the smaller hedge funds (starting from $200 million to $900nmillion) often have less supervision than required leading them to sometimes indulge in transactions and practices that are not strictly speaking, legal. Furthermore sometimes hedge funds trade solely on the basis of algorithms. For instance a recent joke that gained some popularity was that Man AHL’s head of division was paid a ridiculous salary (much more than a few million dollars) simply to switch on and switch off the office lights. Of course, this division head could have employed a few hundred labourers to do the same. However it still bore some relevance because AHL hires PHD’s from Imperial, Oxford and other such universities to create algorithms that would take trading decisions. Where in this whole arrangement is the role of the trader, who analyses the market, considers the political, economic and financial angle before investing billions of dollars. Not to say that the technology behind the algorithms is flawed, however hedge funds in general continue to over rely on newer, more decision making technology, which could undermine their operations one day because a machine simply cannot view the world like a human. That being said there are quite a few Fund Managers who have reported huge profits after adopting this trading strategy.

However, Hedge Funds in general need stricter scrutiny to maintain the fragile economic structure we lean upon now. What with falling crude oil prices, outbreak of civil wars in the Middle East, swelling support for the anti-immigration Sweden Democrats and Donald Trump, do we seriously want to add another financial crisis to our list of woes?

Abhiskek Ajayakumar Parasrampuria is a second year BSc Accounting and Finance student from India. His interests include reading, writing fiction, derivative trading and playing badminton.