October 14, 2019

Are Hedge Funds Good Guys or Bad Guys?

Are hedge fund managers good guys or bad guys?

Hedge fund managers have been portrayed as villains in Argentina and Greece but it may be a fictional portrayal.

Who says you can’t change world events? Tell that to Paul Singer, a “soft-spoken” hedge fund manager in New York. Singer’s Elliott Management is among some investor hold-outs in Argentina’s debt restructuring. Although recent news has centered around Greek debt and the hedge funds involved in the hold-out there, there is a much older battle occurring at the same time. Elliott bought Argentine debt in 2001 at a deep discount after the country defaulted. Most hedge funds decided to accept 30 cents on the dollar but Singer held out for more. Now he’s perhaps Enemy #1 in Argentina. So are hedge funds good guys or bad guys?

Peter Eavis gives some of the history of hedge funds influencing world markets in The New York Times.

Through one of his funds, Mr. Singer is fighting in United States courts to press Argentina to pay up on some defaulted bonds. Argentina’s president, Cristina Kirchner, has refused.

Mr. Singer may be deploying arcane legal strategies thousands of miles from Argentina, but his tactics are dominating the nation’s political discourse. “This has been on the front page every day in Argentina,” said Maria Victoria Murillo, a professor of political science and international affairs at Columbia University.

The ability of hedge funds to act as decisive change agents dates to one momentous trade: George Soros’s bet against the British pound in 1992.

At the time, the British government had tied the value of the pound to that of other European currencies. Many people contended that the pound’s exchange rate was too high in this arrangement and was weighing on the British economy.

Mr. Soros’s fund wagered that the government would ultimately have to let the pound fall in value, prompting the fund to sell billions of pounds and buy other European currencies. The selling pressure was too much for the British government, and the pound left the currency arrangement. The day it dropped out was known as Black Wednesday.

When the dust settled, some politicians saw Mr. Soros’s actions in a positive light. They said the pound’s exit allowed the British economy to flourish.

After the success of his pound wager, Mr. Soros’s fund focused on Asian currencies. They were vulnerable because, like the pound, their value was fixed in a way that could create unsustainable economic imbalances. The bets by Mr. Soros and others forced some countries to abandon the rigid approach to managing currencies, said Sebastian Mallaby, author of “More Money Than God: Hedge Funds and the Making of a New Elite.”

Kynikos Associates and other hedge funds had doubts about Enron’s books and were betting that its shares would decline. Eventually, fraud was exposed, and Enron, an energy trading company, went bankrupt in 2001.

The company’s collapse, with the crash of other fraudulent businesses, helped create the political climate for an overhaul of how companies report their financial condition. A result was the Sarbanes-Oxley Act of 2002.

It is possible, even likely, that something like Sarbanes-Oxley would have developed anyway. But the hedge funds’ ability to pick up on the fraud played an important role in shaming the main players. Auditors, regulators and banks largely missed Enron’s skulduggery, underscoring the need for big changes.

“I can’t think of one major financial fraud in the United States in the last 10 years that was uncovered by a major brokerage house analyst or an outside accounting firm,” James S. Chanos, founder of Kynikos, said in testimony before Congress soon after Enron’s collapse.

Hedge funds also played an early role in the housing bust, which affected millions of people and led to deep societal changes. Managers like Michael Burry of Scion Capital and John Paulson saw the shakiness of the housing market well before regulators, politicians and banks did.

Sebastian Mallaby suggested in “More Money Than God” that currency devaluation was a difficult process but ultimately for the nations’ good. Soros’s moves seem to have put the countries he bet against on a path towards prosperity. The U.K. has done well by staying out of the Euro and Indonesia has been growing profoundly since its currency change.

When I was five or six, I watched all the James Bond movies, not understanding their complicated international plots. To paraphrase a question I would ask every other scene, are hedge funds good guys or bad guys? Hedge funds and their managers may have a selfish interest, but it seems their moves have been in the public interest. “That’s James Bond – he’s a good guy.”

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