M&G’s Dobell blasts ‘selfish’ hedge funds

Date: Tuesday, June 30, 2009
Author: Patrick Hosking and Miles Costello, Timesonline.co.uk

One of the most senior fund managers at Prudential has attacked hedge funds as selfish and devious and blasted derivatives as “the scourge of the modern age”.

Tom Dobell, who manages the £3 billion Recovery Fund for M&G, the insurer’s asset management unit, made the remarks in letters sent this month to the fund’s 100,000 investors.

The salvo came amid evidence that hedge funds are poised to deliver their best first-half returns in a decade, bouncing back from a disastrous spell last autumn.

Explaining his no-frills investment philosophy, Mr Dobell wrote: “We have strenuously avoided the use of derivatives, which I regard as the scourge of the modern age, and have often been at loggerheads with the hedge funds, many of whom I regard as clever but selfish and short-term.”

He said that M&G had refused to lend shares to hedge funds. Borrowing shares is a key part of the process of short-selling — taking down bets on share prices. “We have refused to fuel their [hedge funds’] often secretive and devious tactics by lending out stock in the companies that we hold on [sic] the fund,” he wrote.

Mr Dobell declined on Monday to expand further on the remarks in his letter, which was seen as unusually outspoken for Prudential, but it is thought that many fund managers at M&G are concerned that the activities of hedge funds can damage the interests of traditional investors, forcing some companies into insolvency when a more patient approach might have saved them.

In presentations to wealth managers, Mr Dobell has said that the average share is held now for only nine months. His fund, by contrast, holds for an average of three to five years and has some shares going back to its foundation 40 years ago.

Hedge funds worldwide have returned 5.63 per cent to their investors since January 1, according to Hedge Fund Research, a Chicago-based firm. If the returns hold up over the next two days, it would mark the best first half for the asset class since 1999. Hedge funds have comfortably beaten the S&P 500 index of US shares, which as of last Friday, was only 1.73 per cent higher for the year to date.

However, sceptics argue that hedge fund indices can significantly flatter the reality because hedge funds that fail drop out of the statistics.

One hedge fund chief executive said that confidence in the market returned on a single day in March, when the US Government unveiled the second strand of its Troubled Asset Relief Programme. The signal that the US Administration was shoring up the financial system, particularly banks, made confidence return, he said.

In its draft Financial Services and Business Bill, outlined on Monday, the Government said that it was examining powers for the Financial Services Authority to restrict short-selling.