♠ Posted by Emmanuel in Casino Capitalism,Europe
at 2/07/2011 12:04:00 AM
To be the sad man
Behind blue eyes...
It's pretty safe to say that those working in the financial services industry are the usual suspects when things go awry in the world economy: Erratic market movements? Betting on commodities driving up the cost of living? Casino capitalists playing god with the lives of those in the developing world? Blame it on "the speculators." Two years ago, former Brazilian President Lula (himself a former labour activist) memorably told then-UK Prime Minister Gordon Brown that "blue-eyed" individuals were at fault for the global financial crisis:
This crisis was caused by no black man or woman or by no indigenous person or by no poor person," Lula said after talks with the prime minister in Brasilia to discuss next week's G20 summit in London. "This crisis was fostered and boosted by irrational behaviour of some people that are white, blue-eyed. Before the crisis they looked like they knew everything about economics, and they have demonstrated they know nothing about economics."Now, hedge funds tend to attract a lot of attention for obvious reasons. Not really being obligated to disclose their holdings or trading strategies, they are suspected of any number of things--from fomenting the Asian financial crisis to worsening the subprime crisis. Short selling, hoarding, and similar trading strategies are not usually pleasant matters for dinner table discussion.
Challenged about his claims, Lula responded: "I only record what I see in the press. I am not acquainted with a single black banker." The remarks by Lula, a former trade union leader who had an impoverished upbringing in the poor north-east of Brazil, enlivened Brown's five-day trip to North and South America.
With the spotlight still on hedge funds, they are now more circumspect when it comes to shorting troubled European economies' sovereign debt. The battleground of the Asian financial crisis was primarily Southeast Asia and the subprime crisis North America. Now, though, the theatre of operation is Western Europe. Let's say that scrutiny is forcing many hedge funds not to be so obvious--by purchasing naked credit default swaps on PIGS debt, for instance. Instead, they are waiting for blowback to the very centre of the European Union:
Hedge funds are steering clear of hotly debated credit derivatives and reverting to more orthodox bond plays so as not to invite more regulation from the many politicians who blame them for the global financial crash.I still remember then-Malaysian Prime Minister Mahathir "Death to Speculators" Mohamad calling out George Soros for destabilizing regional currencies. (They eventually kissed and made up.) Every generation creates its bogeymen, and the next one to raise the EU's ire just may be--you guessed it--a blue-eyed hedgie.
Fearing being seen as "bringing down a country", funds are instead trading sovereign and corporate bonds as they hunt for less controversial ways of making money from market volatility. "The larger funds have been really cautious in trading CDS. They don't want to find themselves in the newspaper, and let it become an issue with their client base," said Jeff Holland, co-founder of fund of hedge funds firm Liongate.
Scouring through the track records and portfolios of hundreds of fund managers, firms such as Liongate select other funds to invest client money in, giving them a wide overview of trading strategies used by hedge funds. At the height of Greece's debt problems in February last year, Europe's second-biggest hedge fund firm Brevan Howard, which now runs $32 billion in assets, told its investors it had sold out of "meaningful" positions in CDS and bonds in Spain, Portugal or Italy. The firm declined to give further details.
"Hedge funds have been playing the bond spreads, which is less visible," said Philippe Gougenheim, head of hedge funds at Unigestion, which invests in hedge funds. "In the macro space they're definitely active on the bonds." While data on hedge funds' trades can be scarce, at the time of the Greek crisis last year hedge funds accounted for 12-20 percent of CDS activity, according to one hedge fund industry source, citing estimates from banks...
Leading European politicians have blamed CDS -- a bet on the creditworthiness of a borrower -- for aggravating the debt crisis, allowing investors to speculate on a default rather than protect against it, their original goal. Europe is approving a law giving the European Securities and Markets Authority powers to intervene in markets to ban practices, including naked selling of CDS, where the buyer does not own the underlying bond. That comes after an EU report -- which was not published, despite protests from the hedge fund industry -- on sovereign CDS last year largely exonerated CDS markets for putting pressure on bond prices.
To avoid the risk of tighter regulation, many hedge funds are buying or short-selling sovereign bonds -- even of countries as seemingly stable as France and Germany. "CDS is proving to be a more challenging market for traders, considering that governments are indicating that they could well change how the market is regulated," said Scott MacDonald, at U.S.-based credit specialist Aladdin Capital...
"We're still seeing some funds using CDS but a lot have diversified because of politics and uncertainty in the regulation of CDS," said Ben Funk, head of research at fund of funds firm Liongate, adding that cash bonds and currency also offer better liquidity. He added: "The general consensus is that there's more pain to go (for indebted European countries)... A lot of managers have taken off short Portugal or Spain positions, where it's almost a given there's going to be problems, and have moved to France or Germany...[i]n those countries the spreads are so tight, but should there be instability in the periphery they'll move."
But my dreams
They aren't as empty
As my conscience seems to be...
