Welcome to CanadianHedgeWatch.com
Thursday, February 20, 2020

Comment is free We need a 'bloodhound' hedge fund to sniff out financial skulduggery

Date: Wednesday, July 25, 2012
Author: Brett Scott, The Guardian

Forget the banking inquiry, let's assemble a crack team of activists and ex-traders to profit from exposing top-level scandals

The recent spate of banking scandals has shown how small cracks in seemingly impenetrable corporate behemoths can turn into gaping chasms that engulf whole management teams. Unfortunately, the recently announced banking inquiry is likely to be little more than a symbolic gesture. When push comes to shove, regulators are muzzled by political pressure to prioritise City competitiveness over public interest.

I therefore propose a new "market-based" approach to combat financial skulduggery, tapping directly into financial market dynamics. Barclays' share price plummeted over 15% on the news of the scandal. If someone had shorted (bet against) Barclays shares, they would have done very well. This could be the basis of an investment philosophy. Perhaps we need a hedge fund that devotes itself to sniffing out financial fraud, exposing it, profiting from the resultant scandal and then steering the money back into further financial activism.

The fund could be named the bloodhound fund. The phrase "activist fund" is used to describe any fund that challenges company management, but this would be a truly activist fund, providing a highly useful service for society. Many hedge funds nowadays are electronic, doing little more than push money around in repetitive patterns. The bloodhound fund, though, would be a back-to-basics detective agency, undertaking deep research into bank structures and strategies, and staffed by a crack team of radical crime-fighters.

These could include ex-FSA employees, well versed in regulations, and ex-traders (perhaps rogue traders), well versed at how to circumvent regulations. The fund could hire criminologists, with deep understanding of criminal mindsets and behaviour. Anthropologists would be welcome too many commentators argue that instead of shunning bad behaviour, the internal cultures of finance can actively encourage dubious "Gordon Gekko"-style actions. Perhaps we need some anthropologists to go undercover.

We'd also need forensic audit experts to pore over data to spot anomalies among numbers, while ex-MI6 operatives could trawl through City bars by night in search of leads. Anonymous Analytics could get involved too, specialising as it does in "acquiring information through unconventional means".

Like any hedge fund, it would have to raise money. I suspect ordinary investors might initially steer clear though, simply because there's a significant chance that the bloodhound fund would be considered illegal by the authorities. The unfortunate reality is that while unproductive and excessive speculation is perfectly legal, profiting from proactive investigation of financial institutions would probably be viewed as market manipulation.

I recently advocated a "financial WikiLeaks" to provide a dedicated outlet for information otherwise trapped behind walls of secrecy in the financial sector, but it's likely that this too would be deemed illegal. Much socially damaging financial activity protects itself behind confidentiality laws, hampering investigation of tax avoidance, loans to damaging projects and excessive pay.

Legal details aside, maybe this type of Robin Hood financial activism is what society needs. There is a general lack of faith in the formal policing mechanisms for the financial sector, and laws and regulations appear to be easily circumvented by "creative" behaviour among financial firms. Sometimes it's best to fight fire with fire, and we need to get more creative in fighting financial crime. It's time to release the bloodhound fund.