HEDGE TRIMMING
 
A couple of weekends ago I had the privilege of babysitting my 4 and 2 year old nephews.  Not having any children myself I thought it would be a good opportunity to practice my parenting skills, and I have to say I learned quite a few things.
 
1.  Children that age have no interest in watching golf on TV.

2.  There is a need to invent a rear view mirror that can be attached to the head.

3.  The Disney film Madagascar is quite good fun, but less so the second time it is watched the same day.

4.  The vasectomy clinic is shut on a Sunday. 

The main reason for bringing this to your attention is that in the course of the weekend I watched some children’s TV for the first time in probably 20 years.  In one programme two children were sitting down wearing safety goggles.  Assuming this was due to some dangerous experiment being imminent, I was surprised to find that the real reason for these was because they were going to get a custard pie in their face.
 
Now I am no expert, and there may well be a very high likelihood of “blindness by custard” occurring, but I doubt it.  Certainly, I can’t recall seeing any clowns brandishing white sticks.  No, I am certain it was just another example of our health and safety culture trying to remove any risk, no matter how infinitesimal.  Indeed so prevalent is this behaviour, a recent study identified that today’s children are so protected they are ill equipped to deal with life as adults.  But I digress.
 
It is natural to try and remove risk and danger, and one of the reasons the human race has been so successful is due to our ability to identify danger and avoid it.  It is also one of the reasons why hedge funds have developed to the extent they have.
 
Hedge funds are not a new invention, and have been in and out of fashion for the last forty years.  There are many different types of hedge fund, but irrespective of type, the objective of each of them is to produce positive returns in all market conditions.  In effect take the risk out of investing.
 
The other characteristic they share is that the managers of the funds charge very high fees.  In fact you could say they are exorbitant.  Indeed it has just been reported that Adam Levinson, the manager of a leading US hedge fund, has been paid a bonus of $300million just to stay with his current firm.

They are also unregulated, and are notoriously secretive as to their underlying investments.  However it is their ability to make money out of falling markets by what is known as “shorting” stocks that has made the recent headlines.  It has been suggested that rumours regarding the strength of some of the UK’s largest banks such as HBOS and RBS before their rights issue, were deliberately spread by some hedge funds in the knowledge that the negative effect it would have on their share price would make them and their clients millions of pounds.
 
In effect the “short sellers” were sticking two fingers up to the long term holders of the bank shares, and didn’t care about the harm this could have done, and probably did do, to the rights issue and as a result to virtually every pension fund in the UK.  However, there is evidence that the good times for these funds may be coming to an end.
 
So obvious was it that this behaviour was harmful the Financial Services Authority imposed new rules on short selling stock whilst a rights issue was being conducted, and as a result any company shorting a stock during a rights issue must disclose their position and amount.  Furthermore, these funds which had been making millions every day as bank shares fell, have all of a sudden been caught with their trousers down as bank shares have rallied strongly. 
 
RBS shares are up some 55% from their low point, and one of the reasons why the share price has risen so quickly is due to the “short” sellers being forced to buy the stock to cut their losses.  Although the hedge fund industry insists that “shorting” stocks is beneficial to the market as a whole, there is no doubt it is having a far greater influence on short term stock market movements than ever before.
 
But do they achieve their objective of investing without risk?  Well the answer would appear to be maybe, and no.  Quality funds do produce very good results, but these are virtually all closed to investors.  On the other hand, each year a number of funds go bust with the investors losing all their money. 
 
However a US study in 2006 which compared the returns of the average hedge fund against the stockmarket found that over a ten year period they had failed to match that of a simple tracker fund.  So, in effect over the longer term, investors are paying millions in performance fees for nothing other than having a less volatile investment.  
 
Personally, I believe that regulation of this part of the financial industry is long overdue, and that any institution “shorting” a stock should be forced to declare this whether during a rights issue or not.  There should be no reason why this is not in the public domain - unless of course they have something to hide.
 
 
Steven Forbes
Managing Director

July 2008 Facts

Markets and Managers we met last month

FTSE All Share
1 year return –15.0%
5 year return +36.0%

S&P 500
1 year return –15.1%
5 year return +25.9%

FTSE Eurotop 100
1 year return –21.9%
5 year return +35.9%

UBS UK Smaller Companies (Frank Manduca)
1 year return –30.5%
5 year return +85.8%

Allianz BRIC All Stars (Michael Konstantivov)
1 year return +2.4%
Since launch February 2006 +62.0%

Schroder Multi Manager Cautious (Andrew Yeadon)
1 year return –9.4%
Since launch March 2005 +20.1%

M&G Recovery (Tom Dobell)
1 year return –11.1%
5 year return +92.9%

Source – ft.com August 2008

Best Bank Accounts

Birmingham Midshires e-saver (Issue 2) paying 6.52% pa variable rate, only available over internet, and not available to joint account holders.

(Source – Moneyfacts, August 2008.)