Donna Block: SHARE WORLD
Just when you thought it was safe for a little dip in the world’s financial waters it appears that those sharks of Wall Street, the hedge funds, are preparing a new feeding frenzy.
Hungry after a three-month absence from the international investment scene, the funds are hunting for opportunities to engorge their depleted balance sheets.
Particularly vulnerable are emerging market economies like South Africa’s which are trying to keep their heads above water in a sea of financial troubles.
For the past year, hedge funds have been demonised by finance ministers and central bankers the world over for their role in the global economic slowdown.
Their amoral ravenous appetite for big, easy money, it was said, brought down Thailand first and then all Asia and then Latin America. Troubles in Russia, Australia and South Africa have all been attributed to the funds.
Although the large ones certainly played a part in tanking entire economies, they did not create the problems. They merely exploited them.
Operating like super-rich gamblers fired by cocaine, hedge funds seek out swings in the values of stocks, commodities and currencies and then bet whether they will go up or down or stay the same. The trouble is that often the size of their bets can determine the outcome.
But many hedge funds also became victims of their own murky dealings. As the emerging markets they were playing with began to crash, some funds couldn’t get out of their positions, losing billions of dollars in a matter of hours.
As the trouble started to spread to developed economies, banks started cutting down their risky assets, including those in many emerging market countries. Emerging markets started bleeding money and it was the end game for many hedge funds.
However, hedge funds have been emboldened by the recent global market upsurge, especially in the United States and European stock markets, and talk in the trading rooms is that there is a “mountain of money” out there waiting to find a home.
Many of the world’s 3 000 hedge funds believe they are that home. The spectre of their return is being greeted with dread.
“If hedge funds want to come back into South Africa with its weakening current account deficit and weak reserves, then under these circumstances that’s very bad news,” said Mike Schussler of FBC Fidelity Bank.
There are indications that hedge funds are already active and driving the recent appreciation of the rand.
In June and July when the rand bottomed out at R6,70 to the dollar, funds were selling rands to get dollars. Now they’re buying rands and investing in bonds to take advantage of the high interest rates and then taking steps to limit their rand exposure. This may not be a bad thing at the moment as the rand is being bought and not sold, keeping the currency at this lofty level.
But how long this will last, especially in light of the poor economic figures just released and an election six months away, is anyone’s guess.
Funds can change their thinking at the drop of a hat, which is what makes them so frightening to anyone trying to plot a stable economic policy course.
However, there is reason to take heart. The truth is that hedge funds ain’t what they used to be.
Three months has been a long time. These funds saw their liquidity dry up and don’t have the same firepower they used to. They’ve become suddenly smaller, wiser and possibly humbled by their recent experience and failings.
There are also other reasons why hedge funds might want to play it a bit more cautiously this time around.
There are calls in the US Congress and elsewhere for the funds to be regulated to make assets and borrowing requirements tougher. There is also talk of listing funds on the stock exchanges so the man in the street can participate.
At the moment hedge funds are only open to the very rich. To join the club the price tag for an individual is usually a net worth of more than $1-million and an annual income of more than $200 000. Investment minimums can range from $100 000 to $1-million or more, depending on the fund.
The funds have come to the realisation that they are not infallible. Part of their mistake was the hubris of believing they were bigger than the markets. Such funds turned out to be some of the biggest losers.
Tiger Management, the largest hedge fund, lost $2-billion in 24 hours when the dollar plunged against the yen.
Long Term Capital Management has been by far the worst disaster story to date. It was rescued to the tune of $3,5-billion by the many banks that had previously lent it billions of dollars.
The banks had no choice; it was either bail the fund out or go under. According to Alan Greenspan, chair of the US Federal Reserve Bank, if Long Term Capital Management had gone down, it could have caused serious damage to scores of market participants, and “could have potentially impaired the economies of many nations, including our own”.
Nevertheless, hedge funds are slowly finding their feet again. Investment banks keen to restore their balance sheets are being cautious but still lending to hedge funds.
Yet, as one European fund manager said, “chaos breeds opportunity and the opportunities are out there now”.
And where there is opportunity, like where there are lots of fish, hedge funds and sharks will always be found.