Hedge funds rock through crisis

What do the names Trichet, Soros and King all have in common?

They are all respected actors on the stage of international finance.

And they've all made comments in the recent past suggesting that, despite optimistic musings in the US, the worst of the credit crunch is not over.

Jean-Claude Trichet (European Central Bank president), Mervyn King (Bank of England governor) and influential billionaire investor George Soros have all suggested that markets will remain volatile, with Mr King going as far as to say that the "nice decade" was over.

Despite these gloomy prophesies from money market gurus, many in the financial hub of the City of London are putting on a brave face and doing their bit for charity.

For the second annual May Fair concert, ties and briefcases were discarded in favour of T-shirts and plectrums, as bankers went bonkers at a charity gig for handicapped children.

But beneath the bonhomie and benevolence at the salubrious Café de Paris venue in central London, there was a distinct whiff of nervousness.

Hundreds of jobs are being shed every week by banks and hedge funds in the City and an estimated 20,000 are set to go over the next two years, according to the Centre of Economics and Business Research.

Darwin days

"There's no doubt that the City is hurting. It's going through a metamorphosis," says Saleem Siddiqi, who runs the Tapestry hedge fund.

"People trim excess fat in leaner times. It's part of City life - people get fired when moments of stress occur. I look upon it as a form of financial Darwinism," adds Mr Siddiqi, one of the founders of A Leg to Stand On, which teaches local doctors in India how to fix physical deformities in children.

"There is fear in the market. But does that mean less opportunity? No.

"If you look at hedge fund returns, you'll find that historically, some of the best returns have been achieved after moments of massive financial stress in the system."

It's all in stark contrast to last year's event, when hedge funds et al were in their pomp, commanding record-breaking fees and contributing to all-time highs on the Dow Jones Industrial Average.

That was then and this is now. Banks are commonly acknowledged to be going through a credit shock not seen since the Great Depression, with some, including Bear Stearns and Northern Rock, going to the wall.

Even the world's largest and more profitable banks are so suspicious of each other's ability to repay that lending has all but dried up.

And that's being felt at charity fundraisers such as the May Fair in Leicester Square. Last year, banks sponsored most of the tables at £125 ($250) a person.

This year, because their entertainment budgets have been slashed, it was mostly rich individuals picking up the tabs. There were also a few bankers at the event last year who are now looking for a job.

Sanguine over slowdown

But, unlike banks and private equity groups, hedge funds are, by their very curious nature, well placed to survive the credit crunch.

That's because they can make money in a falling market almost as much as a rising one. For example, they often take "positions" or bets that a stock or bond will move a certain way and cover themselves if it doesn't by insuring or "hedging" that risk somewhere else.

Because of their complexity, their secretive nature and the fact that they, unlike banks, are largely unregulated, hedge funds have attracted suspicion and criticism from many quarters.

But they are also a vital part of the British economy. Last year, the City of London accounted for nearly half of Britain's GDP growth.

It pays one-third of all corporation tax and contributes a surplus of nearly £20bn to the trade balance, while more people work in banking and finance in Britain than construction, agricultural and factory workers combined.

But the British economy is slowing down. Spending in the shops is sluggish, food and fuel prices are rising and property prices - irrespective of which company measures them - are falling and may continue to do so for a while.

Despite this, hedge fund managers view the current situation in sanguine terms.

"Inevitably you'll see cycles. Bubbles develop in certain areas, whether it's the Savings & Loan crisis in US or the Russian bond fiasco, it takes time to work its way out of the system and inevitably we'll have a bubble somewhere else in the future."

That's the view of Peter Moss, non-executive director of hedge fund Crosby Asset Management and something of a City grandee, with nearly 30 years of experience in the financial markets.

"The trend is your friend," he says, "until it bends. Or to put it more cynically: markets go up until they don't, which is maybe what we've seen in this credit bubble caused by low interest rates."

The question is not whether this current trend downwards is your friend, but when, or whether, it will bend. Perhaps Messrs Trichet, Soros and King know the answer to that.