Daily Mail on top form...

A rising star hedge fund manager won £110million by betting against the pound ahead of Britain’s vote on the European Union.

James Hanbury, who manages £1.1billion for Odey Asset Management, went against complacency in the rest of the market which assumed Remain would win the historic referendum.

He guessed that Britain might shock the world by voting to Leave – and that the value of sterling would plunge as a result.  Mr Hanbury, 36, commissioned a private poll which put Remain narrowly ahead.

But he decided to take a risk on the basis there was a lot to gain and little to lose, given the pound might drop massively if Britain quit but was unlikely to rise much higher if it voted to stay.

And the father-of-three, who lives in a £3.4million house in London’s super-rich West Kensington neighbourhood, won big.

Tee hee. And give that man a pat on the back.

From the FT 9 October 2010:

Sir, The FT report on hedge fund managers moving to Switzerland (“Hedge fund shift costs UK £500m”, October 2) gives the impression that there will soon be a glut of empty offices in Mayfair and the City of London as hedge fund managers stampede to move to Switzerland.

In reality, this is not the case.

Frstly, immigration requirements in Switzerland are complex and not everyone from London will be eligible to work there. Secondly, for the principals of the business, relocating to a new country will be fraught with family and domestic considerations notably spousal consent, continuation of schooling arrangements for children, etc. Thirdly... the actual rate of tax savings on attributable non-Swiss earnings, on a marginal basis, is unlikely to be more than about 15 per cent [etc]

Joe Seet, Senior Partner, Sigma Partnership, London EC3.

From the FT, 12 July 2015:

Brevan Howard is moving some of its most senior traders back to London from Geneva, reversing a high-profile decision by the $27bn hedge fund to leave the UK and bucking concerns that the City’s status as Europe’s leading hub for the industry was under threat.

The decision comes as a number of other large hedge funds are also planning to expand or launch in the British capital, in a sign that international investors continue to gravitate to London.

Hedge fund managers and investors argue that low tax rates have failed to win over traders to the merits of life in Switzerland, with many leaving their families behind in London.

Fun with JP Morgan

There are plenty of stories about JP Morgan bank losing £2 billion on some stupid bet, but the interesing question is, who took the other side? That money doesn't just disappear into thin air.

According to CNBC:

... as a trader for JPMorgan in London was selling piles of insurance on corporate debt, figuring that the economy was on the upswing, a mutual fund elsewhere at the bank was taking the other side of the bet.

The trade contributed to more than $2 billion in losses for JPMorgan, which disclosed the loss last week. The hedge funds, including Blue Mountain Capital and Blue Crest, have profited handsomely thus far as the markets move against JPMorgan.

But perhaps one of the most surprising takers of the JPMorgan trade was a mutual fund run out of a completely different part of the bank. The bank’s Strategic Income Opportunities Fund, which holds about $13 billion in client money, owns about $380 million worth of insurance identical to the kind the “London whale” was selling, according to regulatory filings and people with knowledge of the trade. It is unclear how much the fund made.

The good news is, whoever takes the winning side of the bet gets a big bonus and whoever takes the losing side gets a smaller bonus, or none at all. So it's in the interest of bank employees and hedge fund managers, taken collectively, to make as many stupendously large bets with other people's money as possible on anything that looks even vaguely plausible; whatever happens, their overall wealth increases and everybody else's overall wealth goes down. But I am sure that all these traders and experts are far too honourable (or too stupid) to ever cook up such a scheme.

Property boom and bust presentation - enjoy...

House price crash presentation

View more presentations from TheSqueeze.

Blogger Government

MW recently asked me if I had sorted out my financial services policy as Financial Services Minister in his Government. Here is my first draft for comment. Lola.

The Bloggers Government: Financial Services Policy

1. Basic Principles.

The State has no business in business and money. It has a small responsibility conferred on it by the electorate to carry out some work as insurer of last resort and lender of last resort.

All EU directives will be ignored and the rest repealed.

The central principles behind these proposals is responsibility. Caveat Emptor and Professional Responsibility will be guiding principles.

2. Central Banking

The role of the Bank of England as central bank is abolished. It will set rates of interest with reference to its own demands for the Official Currency.

3. Interest rates

Will be set by the money markets, not the central bank.

4. Money

The legal tender laws are abolished.

The Pound Sterling will continue to exist and be offered by the Bank of England as the Official Currency. It will be the official currency of government. Its rate of exchange will float. It will be backed by adequate bullion reserves. It will be kept honest by competing domestic money and the absence of an official exchange rate.

5. Financial Regulation

a) All the existing regulatory regimes are abolished.

b) All deposit protection schemes are abolished

(All statutory deposit protection schemes will be abolished, but in the event of insolvency or breach of capital ratios by any licensed deposit taker, depositors (as defined) will be given priority of repayment, and any agreements as to security between bondholders and the deposit taker will be subjected to claims of depositors. Debt for equity swaps will be the preferred method of recapitalising banks.)

c) All compensation schemes are abolished.

6. Banking

Deposits into banks will be the property of the depositor.

The freedom to issue money will be returned to the people and by association, banks, to use if they wish.

It is expected that 100% secure bank deposits will be backed by 100% reserves of bullion. It is also expected that Banks will offer accounts with higher rates of interest that are not 100% reserved. Customers will be made aware of this and will be able to choose the level of risk and reward with which they are comfortable.

Banks will be encouraged to seek commercial insurance for depositor protection. We anticipate that market forces will compel banks to do this.

Limited liability will not be available to the owners or senior managers of any bank that seeks to do business in the UK.

7. Insurers

All the current reporting requirements will be abolished. It is anticipated that accounting standards will rise since auditing accountants will have 100% responsibility for their work and will not be able to escape professional responsibility. The State will require professional institutions to undertake that auditors have sufficient resources to underwrite this responsibility.

Auditors will be personally liable for any losses suffered by third-party investors up to a maximum of the amount by which the company's net assets were overstated." (e.g. as should have been the case with E&Y/Equitable Life). This same discipline applies to all auditors of all financial businesses, for example banks, intermediaries, fund managers etc etc.

8. Specialist and International Institutions engaged in financial engineering.

All regulation is abolished, but the shield of limited liability will unavailable to such institutions.

9. Retail Intermediaries

Intermediaries will have two categories, independent and other. Independent intermediaries will be the clients agent, other will not. It is anticipated that market forces and competition and self interest will drive the establishment of representative institutions to promote and regulate these categories.

10. Disclosure

The single regulation that will remain is that of full disclosure of costs and charges, rates of interest – both APR and flat rates and any other factors that deduct money from client money or are taken.

It is anticipated that the various industry grouping will set up their own bodies to regulate this as it will be in their self interest to do so.

11. Pensions

All final Salary pensions will be phased out. The sole means of pension saving will be in money purchase schemes. This will ensure that members are not ripped off by arbitrary actuarial calculations when moving jobs (a big friction in the labour market) and that real savings are made to fund pensions, which will provide more proper capital for investment. At the same time the tax relief on schemes will reinstated recognising that pensions are deferred pay, meaning that benefits when taken will be taxed as earned income. Contribution levels will be set at a maximum annual of 25% of NAE (or 100% of Citizen's Pension - see MW on LVT). There will be no minimum retirement age.

12. Collective Investment Schemes (unit trusts, OEICs, Investment Trusts, ETF's etc)

Rules and Regulations will remain roughly as they are but repsonsibility will be transferred from the State to self regulation. All compulsory compensation schemes will be abolished (moral hazard) but it is expected that good companies will combine together to provide some mutually protective accreditation which will include investor protection - commercially funded. ISA's and PEPs and EIS's and all that stuff will all be scrapped. But since the dividend tax credit will be reinstated (and CGT has been replaced by LVT) this will not matter. Investor decisions will not be distorted by tax considerations.

Readers' Letters Of The Day

From the FT:

... With regard to compensation, many affected residents feel that the "preferred [High Speed 2] route" has been chosen precisely because the government believes it can minimise pay-outs on the simple premise that the fewer the number of houses deemed to be affected, the less will have to be disbursed.

They contrast this extensively rural "preferred route" with the route chosen for High Speed One (formerly the Channel Tunnel Rail Link). The latter was built almost entirely along its length directly beside high-capacity transport corridors – the A2, M2 and M20 – which generate a correspondingly high level of noise.

The same criterion was not applied to the choice of route for HS2. The effects of 225 miles per hour trains almost every two minutes will be far more acute in a rural setting rather than adjacent to a busy motorway...

Marilyn Fletcher, Great Missenden, Bucks.
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Also from the FT:

Sir, John Kay's article On guard against the robber barons of the Rhine (Comment, August 18) was clever in the tactful way it raised important questions. Are the hedge funds toll collectors or value creators? One feature of the toll collectors of the Rhine was that the travellers had no choice but to use the Rhine and pay up.

Hedge funds may be the ultimate "heads I win big, tails I do OK" contract for the manager. But we don't have to use hedge funds, so we can't call them robber barons...

Martin White, Chairman, UK Shareholders' Association.
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Correct - hedge funds may well fleece their investors, but nobody is forced to invest in them, so AFAIAC, they are neither toll collectors nor robber barons.

But it's a useful analogy...

The first letter turns all logic on its head. The area between London and Birmingham is nigh uninhabited anyway, so if you just drew any old straight line, only a few hundred buildings would need to be demolished. But all things being equal, is it not better to put a few curves in so that only a few dozen need to be demolished? Isn't it reasonable of the government to try and minimise disruption - for its own sake and to minimise compensation claims?

The idea of running the line along the M40 motorway (or using the old Great Central Railway) is not entirely without merit, but again, this goes closer to existing towns and villages (which in turn have grown up around the junctions), so it would require thousands, rather than hundreds or dozens of buildings to be demolished.

So I think we can dismiss the first letter as special pleading - what the lady wants is extra 'compensation' from the people who want to travel from A to B. Using the analogy in the first letter, put yourself in the position of somebody who wants to travel from A to B - what do you call people who demand money from you along the way?

Toll collectors, robber barons or even highwaymen? I'd hardly call them 'value creators'.

Diplomatic Coup Of The Week

From The FT:

Downing Street rejoiced at what it portrayed as a diplomatic coup for Mr Brown. "Gordon has spent years building up political capital..." said one aide.

OK. Guess what the coup was. Was it

a) A guarantee of support from the USA in any possible unpleasantness with Argentine;

b) The release of Aung San Suu Kyi from house arrest and the announcement of free and fair elections in Burma;

c) Iceland's solemn undertaking to refund UK taxpayers for the billions it cost them to bail out reckless depositors; or

d) "... a last-minute reprieve from contentious new European regulations... after Gordon Brown pleaded that the issue be shelved until after the election. The personal intervention by the prime minister staved off certain defeat for the UK at a finance ministers' meeting in Brussels, where France leads a powerful coalition that is calling for tough regulation of the sector."

Make of that what you will. I shall be spending the rest of the day in sunny Milton Keynes.

More Hedge Fund Sour Grapes

Further to the hedge funds vs Porsche spat I highlighted recently, CityAM has reported another merry tale where a company appears to have outsmarted the hedge funds, who have promptly threatened to take the company to Court:

BIG Brother producer Endemol is involved in a fracas with a powerful group of hedge fund owners. The hedge funds, which own Endemol's £1.9bn debt, have accused the television giant of financial engineering to avoid breaching its loan agreement.

The spat broke out over a complex scheme in which Endemol was buying back its own debt at a discount from the original price and booking a profit on the purchases, thereby inflating its bottom line. The hedge fund owners, including Goldentree Asset Management, Centrebridge Partners and Stanley Advisors, say the scheme has artificially inflated Endemol's earnings by as much as €81m (£70m) – a third of its profits...

In case you're wondering what this means, it is yet another cunning variation on the debt-for-equity swap. Endemol borrowed money by issuing bonds at 100p in the £. If they are trading at less than par, let's say 80p in the £ (because Endemol is seen as not such a good bet or because interest rates have risen etc), and Endemol has a bit of spare cash, it can improve its net assets position (i.e. shareholders' funds) by taking £80 out of its bank account and redeeming bonds with an accounting value of £100. This reduces the assets side of the balance sheet by £80 but it reduces the liabilities side by £100, hey presto, under accounting standards, this is a £20 "profit".

Although the profit is not normal trading income as such, it is definitely a gain from the shareholders' point of view; is in no way "artificial"; and that is the end of that - if the lenders' covenant stipulates certain minimum ratios and the new look balance sheet complies with these, then frankly, what is the hedge funds' (i.e. lenders') problem?

Bad Losers Of The Week

Those hedge fund boys don't like it up 'em:

Luxury car manufacturer Porsche is being sued for more than $1 billion by four hedge funds which claim company executives gave them advice about shares in Volkswagen (VW) without informing them that it was about to bid for the other motor firm... Their complaint said [Porsche] had intended to purchase more than 75 per cent of VW's shares, easing the path for a takeover bid...

Many hedge funds and investors bet on falling share prices in VW but lost money following Porsche's steady accumulation of the stock that drove prices higher. In October 2008, Porsche revealed the extent of its share ownership, sparking a market frenzy that saw the value of VW shares quadruple [and on which Porsche madea colossal profit at the hedge funds' expense]...

Y'see, trying to legislate against naked short-selling is an exercise in futility, and probably pointless, even if it were possible. It's lirttle examples like this that serve to remind the hedge funds that short-selling is not a one way bet, so allowing them now to cry foul and get their money back would be a lesson in moral hazard.

Re: Hedge funds relocating from London to Switzerland

It must be pretty obvious that the 50% top rate of income tax, which will take effect next year, and which the Tories have no intention of scrapping, makes the UK a less attractive place for high earners (which is why it is highly doubtful whether the increase in rates would increased overall tax revenues - it only requires a small increase in people emigrating and a small reduction in the number of people immigrating for it to lead to a fall in revenues).

Add to that the loony regulations on hedge funds that our benighted government has proposed as part of the strategy of "deflecting the blame from ourselves by bashing the banks", which will exacerbate this with regard to hedge funds in particular.

Lo and behold, hedge funds are relocating to Switzerland en masse, no surprises there. This Guardian article mentions a canton where the personal income tax rate is only 18%, which is highly misleading, as there are federal, cantonal and local income taxes, although according to Wiki "The total rate does not usually exceed 40%."
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When Uncle Vince came up with his modest Mansion Tax proposal a couple of weeks ago (half a per cent on the value of homes that exceeds £1 million), the landed gentry started bleating that this would drive high earners abroad as well. Now, remember The Golden Rule that taxes are borne by the least mobile factor of production, which in a very literal sense means land and buildings (but also the lumpen proletariat, who cannot just flit abroad), so while the fifty per cent income tax rate has this effect (and over-regulation is like a hidden tax), the Mansion Tax doesn't.

How can we "prove" this? Well, you can never "prove" anything (especially to an audience who do not want to believe it), but the rule is illustrated by the fact that in Switzerland they still have Schedule A taxation (i.e. you pay income tax on the notional rental income of property you own, even if you live in it) and they have a fairly modest wealth tax as well, which means the overall average tax burden on property is about one per cent of its market value (or rather more than twice as much as the "Mansion Tax").

People thinking of moving to Switzerland aren't perturbed by this, as the tax acts like a higher interest rate, i.e. the capital cost of buying a property to live in is reduced to balance out the higher tax burden - the whole thing is no worse than part-funding the purchase with a compulsory, interest-only, non-repayable mortgage with an interest rate of one per cent, a notional loan that is waived when you sell the property again.
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Even more interesting is the fact that property prices in the affected parts of Switzerland are going up, because these higher earners are prepared to pay a premium to live there to escape the additional ten per cent income tax in the UK (in the long run, the value of the premium = the net present value of the tax you can avoid by moving there), which is Ricardo's Law Of Rent in action on an international scale.

Fun with numbers

As Pommygranate explained a year and a half ago, hedge funds are not only a zero-sum game*, but the managers charge handsome fees on top - a 2% management charge on the total investment, plus 20% of any upside, making is a negative sum game from the investors' point of view.

It appears that there were lots of 'funds of funds' or 'feeder funds' that exist merely to invest in actual hedge funds, such as, er, Bernie Madoff's, 'nuff said. Their charging structure is just as outrageous, according to the FT it's 1% management charge and 10% of any upside.

So, to break even (and assuming no gearing), if you invest in a 'fund of funds', the underlying return would have to be well over 4%, year on year. Seeing as hedge funds are ultimately a zero-sum game, you would be getting poorer on average by 4% a year. Hmmm. Even the bank of mattress gives you better returns.

* I could put a perfectly convincing case why the price of anything - let's say gold - is going to rise over the next year, and entice investors to entrust me with their money in my GoldBull Fund. Somebody else could make the equal and opposite case that the same commodity is going to fall in price and set up his own GoldBear Fund. Whichever one of us is right, we both collect 2% of the money entrusted to us, plus 20% of the movement in the price of gold, be that up or down; or if we gear up ten-to-one, 200% of the movement in the price of gold.

Hedge funds

I added Pommygranate's fine post "Ten things you should know about hedge funds" to my 'Words of wisdom' section back in August 2007 (and it was not particularly original even then, it's just a very good summary).

Martin Wolf* wrote a scholarly summary of some academic analysis, produced by "two distinguished academics, Dean Foster at the Wharton School of the University of Pennsylvania and Peyton Young of Oxford university and the Brookings Institution" for today's FT, which says much the same thing. Without the humour.

Blogosphere: one, MSM: nil.

* Do not get me wrong, I am a big fan of Martin Wolf, all in all.