Hedge funds not selling themselves short

Date: Monday, November 19, 2007
Author: Helen Power, Telegraph

Among the winner of the volatility are the 'hedgies' - but not everyone thinks they are playing fair. Helen Power investigates

They thrive on market volatility and they gamble on failure. Short-sellers, mostly hedge funds, who bet that a share price will fall, have emerged as the biggest winners of the credit crisis.

Short-selling is not illegal and nothing new: George Soros famously shorted the pound in the early 1990s. But in recent months concerns have arisen that some of these speculators have been spreading false rumours about companies in the hope of driving down the share price and making a hefty profit.

Last week, the London Stock Exchange berated them for gambling in shares of Northern Rock, while hedge fund trading helped send Barclays' shares on a roller-coaster ride amid rumours its top management was about to quit over massive losses.

One senior City figure says the ubiquitous presence of hedge funds is one of the factors driving companies to abandon public markets.

"Hedge funds are in and out of share registers faster than you've had hot dinners," he says, adding that even before the credit crunch hit, the share price volatility caused by hedge fund trading was making life so difficult for management teams they were being forced into the arms of private equity firms.

The hedge fund industry itself, of course, takes quite a different view.

Andrew Baker, deputy chairman of hedge fund trade body, the Alternative Investment Managers Association (AIMA), says: "There has been a bit of demonising going on here.

"When a market is in freefall there are always going to be rumours. There's nothing wrong with that. It's when someone tries to pass a rumour off as fact that it becomes collusion," he says.

Some of the world's biggest hedge funds have been involved in the short-selling of bank stocks recently, with Northern Rock the biggest gamble in town.

On one side are Lansdowne Partners, GLG and Marshall Wace, The three are not associated with the rumour-mongers, but have been short-selling Rock shares believing there is no value in the equity and that the bank's share price will fall. On the other are Philip Richard's RAB Capital special situations fund and SRG, the new hedge fund run by colourful former UBS trader Jon Wood, which have been buying up shares, gambling their price will rise.

So far, it is Lansdowne, GLG and Marshall Wace that are winning with Northern Rock shares trading at 132.6p. City gossip would have it there are a lot of zeros on those profits.

But industry insiders argue that the very fact hedge funds are taking positions on both sides of the divide demonstrates that they are doing exactly what they are meant to do - helping the financial markets function by providing them with extra liquidity.

"Liquidity is a two-way street - if you want to sell something you need to find a ready buyer. To find a short seller ready to take risk is part of the operation of the market," says Baker.

Others argue that the wild volatility in the markets - particularly in the shares of banks and other companies in the financial services sector - is not being driven by hedge funds at all.

Some argue the banks and other financial institutions whose shares are being shorted have brought trouble to their own doors with reckless lending practices and a failure to fully disclose losses.

"It's not hedge funds that did this - this is something the management of the banks, which have been bitching and moaning did," says one hedge fund manager.

Another group of hedge funds points the finger at investment banks' proprietary trading desks, claiming it is they, not hedge funds who are driving the rumour mill.

RAB's Richards has said that he heard the same false rumour about Northern Rock from five separate prop desks.

"Philip doesn't have anything per se against short-selling. But he objects to short-selling plus spreading negative rumours," says one source.

NOAM GOTTESMAN

GLG

For a while GLG Partners was in the news for its former star investment manager, Philip Jabre, who was given a record £750,000 fine by the FSA. But both the fund and Jabre have moved on.

GLG, which is led in London by $100m-a-year Noam Gottesman, has bounced back with some canny investments in Northern Rock since the credit crunch hit.

Gottesman and his co-founder Pierre Lagrange are former Goldman Sachs men and Gottesman still trades personally despite the burden of running a £6bn fund.

The pair netted nearly £500m each when they floated GLG on the New York Stock Exchange this year. Both have a workaholic approach to life with staff in the Mayfair offices often working from 6am until midnight.

PHILIP RICHARDS

RAB CAPITAL

Former Army officer Philip Richards is the “R” in $7bn (£3.4bn) RAB Capital. Until this year, he was most famous for his generous donations to charity and his Christian lifestyle – he donates a tithe of a 10th of his salary to the church.

But since the run on the bank, his name has rarely been out of the press on Northern Rock issues. Richards runs RAB’s special situations fund and has led the charge on its investment in the Rock, of which it now owns 6.66 per cent.

Richards has attacked rival hedge funds for stirring up panic about the bank and has also said the FSA has not done a good enough job of regulating trading in its shares. His rivals arguehe has a vested interest in talking up the value of the Rock’s shares.

PAUL RUDDOCK AND STEVEN HEINZ

LANSDOWNE PARTNERS

London-based Lansdowne Partners is run by Paul Ruddock – former head of international business at Schroders – and Steven Heinz – who managed equities at Harvard Management, both in their 40s. The pair are thought to earn a whopping $150m-$200m a year apiece and are worth billions more after selling a slice of the firm to Morgan Stanley for $12bn last year.

The fund also employs Arnab Banerji, a former senior economic adviser to Tony Blair. Lansdowne is the fund on the lips of most City insiders when asked who has made a mint out of Northern Rock and is thought to have coined in $200m by short-selling the bank in September, taking it to its best trading month in history. Its $6.5bn UK Equity Fund is up 21.5 per cent after bouncing back from its worst ever month in August.

IAN WACE AND PAUL MARSHALL

MARSHALL WACE

While Ian Wace started his working life at SG Warbug – now part of UBS – his co-founder Paul Marshall’s first job as a scaffolder. Marshall, who has been at the forefront of the industry’s attempts to put together a voluntary code of conduct, eventually moved to Mercury Asset Management and the pair joined up to form Marshall Wace.

The firm’s Tops Fund takes both long and short positions in equities, but it went short on Northern Rock, bringing in the money. The duo are now thought to be worth well north of £200m, but while they share a love for money-making, they have very different politics.

Marshall may well be the only master of the universe to fall in love with the Liberal party and is a mate of former leader Sir Menzies Campbell. Wace, meanwhile is a Tory whose political friend is Michael Heseltine.

JON WOOD

SRG CAPITAL

Jon Wood’s Monaco-based hedge fund SRG Capital is relatively small with around $3bn under management, but he’s taken a big gamble there’s still some value left in the Rock’s shares and now owns 6 per cent of the bank.

At Kleinwort Benson, Wood’s derivatives department made millions from the 1987 crash. He was the star trader at UBS before a High Court run-in with Scottish entrepreneur Tom Hunter about the Gadget Shop, a retail outlet they once co-owned.

He is one of the City’s toughest characters and the judge in the Gadget Shop High Court case, which he lost, described him as “a very hard and calculating man, albeit attempting to present himself in a much softer way.”