I have just got back from a skiing trip I took with a group of friends employed in a broad range of fields. Among our group we had lawyers, salespeople, PR executives, doctors, public sector policy advisors, students, a hedge fund manager and, of course, one journalist. I am sure there were several people among our group who work just as hard and for as long hours as the hedge fund manager as part of their working week. I would venture a guess he was the best paid of our group, though it would be just that: a guess. It stands as a fact, though, that he was the only one of the group that brought work with him, disappearing intermittently when others were nursing sore limbs stretched in front of a DVD or indulging in the delights of some après ski. So, I conclude fund managers, while being well paid, are among the worst victims of the technological revolution and the increasingly mobile office.
Where do journalists fit into this? We are eyed with similar levels of suspicion by Joe Public. Our motives are assumed to be dubious by default. And we have also been simultaneously blessed and cursed by the marvels of the technological revolution. I am off to Cayman this weekend, ahead of a special report on the island’s hedge fund industry I will be writing. I will have full access to my emails and to this blog, so I shall be keeping a log of my thoughts and reactions to the island, which I have never visited before. Hopefully I will find time to enjoy some of the more natural pleasures of the island as well.

Once the threat of Al Qaeda has been vanquished, (and we have to expect victory is imminent, we are winning!) what then? Never fear. I know the idea of blissful utopia is unpalatable and will lead to uncomfortable questions regarding the disappearance of antiquated niceties such as civil liberties. As Orwell understood all too well, we need a state of perpetual war to ensure social cohesion. The next phase will be The War on Hedge Funds.
Bear with me. The first stage of a modern war, (in modern wars we don’t fight states, we fight other, more general nouns, like drugs, terror, climate change or obesity) is the propaganda offensive, or the battle for hearts and minds. In this instance we can see the state is prepping us with an offensive conducted through the mainstream press.
Pick up any copy of the FT or The Economist and see: investing in hedge funds is seriously bad for your health. The very best that can happen is you will have wasted your money- given the paucity of returns you might as well just invest in an index.
More likely however, you will be fleeced by one of the hundreds of thousands of criminals that lurk in the sector, using it as a vehicle for hiding in the financial shadows, undetected by the superheroes at the FSA and SEC.
Even the managers not bent on disappearing with investors’ money must be viewed with extreme caution. Their motives, put simply, are to destroy honest, hard-working companies for no reason other than that they can. As activists they derail company boards. As traders they short sell innocent company stock into oblivion. As arbitrageurs they use mathematical wizardry to conjure up money from nowhere, essentially theft from everyone. Anomalies should be left in the system where they benefit all. In short, they are locusts. They must be stamped out. Get yourself down to the chemist for some bug-spray immediately.
The beauty of the war, from the state’s perspective, is anybody can be a hedge fund. Hedge fund managers look like anybody else. They blend perfectly into the crowd, so you never know if you are safe. The person sitting next to you on the train could be a hedge fund manager. The Morrisons bag is a cunning disguise: if you look carefully the food inside is from Waitrose.
All commuters and members of the general public are advised to be on the look out for any suspicious signs, such as people looking unnaturally engrossed in weighty company reports or murmuring mathematical equations in tones usually reserved for pillow talk.
The SEC has already begun the preliminaries by looking for ways to ensure managers from all over the world register. Died-in-the-wool liberals, the scourge of society, will only hold them off for so long. Activities will ultimately be closely monitored so that local schools and day-care centres can be informed if they have a hedge fund operating in the community.
Pleasingly for those on the outside of the hedge fund community (you’re either with us or against us) it has already begun in-fighting, especially in the US, the hot-bed of hedgerism. Investors in the Big Apple have been sued for having the good sense to withdraw capital from funds that fail to live up to their standards of due diligence, or when they decide something that looks too good to be true probably is.
Is it just me or is this not utterly absurd? Apparently having any sort of intelligent thought now comes with the baggage of a legal obligation to assist those too stupid or lazy to have their own. The good news is investor due diligence is now a pointless luxury, a thing of the past. Once one person has conducted it they will have to share their thoughts with everyone else.
Here’s a couple of money making schemes, that I think, in the current climate, are fool-proof. If a fund blows up, find someone who saw it coming and didn’t invest and sue them for your losses. (It is not feasible that someone could have made a decision to not invest, or withdraw funds, unless they had illicit insider information, after all.) Conversely, any fund that doesn’t blow up that you aren’t invested in, sue someone else who didn’t invest in it for misleading you into thinking it was fraudulent by avoiding it.

Cayman is the hedge fund industry’s Mecca. Every believer should visit the island once. Though many, probably most, hedge fund managers do not.
It is fashionable in Cayman for administrators and law firms to have huge TV screens in their lobbies displaying the names of all the companies registered at the building address you are in. Everybody knows there are a lot of companies and funds domiciled in Cayman that do not have a significant, or often any, work done there. It is still astonishing to see the sheer number of names scrolling down on these screens though. I waited in the lobby of one administrator for my interviewee to come downstairs for five minutes, in which time they scrolled from o to r.
Cayman, I was told today, is the size of Hong Kong, geographically speaking. If all of the companies registered here were to actually move to the island to conduct their business, it would surely need to build more sky-scrapers than the Chinese city boasts. It would be bedlam.
US Senator Charles Grassley of Iowa has taken steps to ensure fund managers cannot claim tax breaks associated with the US Virgin Islands unless they can prove they live there, and demonstrate the fact in a number of ways, such as showing their children go to school there or that they attend church on the island. Of course, this is the US Virgin Islands, not Cayman, but in principle it is not so different. A comparable situation in Cayman would mean a lot of these sky-scrapers would need to have floors set aside as churches, with probably a whole separate floor dedicated to church-attendance paperwork.
Another thing that would seriously need to be revisited if there was an influx of people to the island of this size is the street numbering system. To be fair it could use some attention even without more people. The only upside is that, while walking up and down the street on numerous occasions over the past two days looking for offices, I have caught the sun quite nicely.
As an aside, do you know what your fund administrators do in the evening? Tonight I was in a restaurant with a colleague and our very friendly waiter turned out to be a fund administrator by day, helping his restaurant-owner friend out. If ever I saw a contender of service provider of the year, this man was it.

On Friday I was at a conference at The Marriott in Cayman, which was very well attended and seemed universally regarded as a success. Hats off to Campbells for organising a first class event, which managed to explore various hedge fund-related subjects in considerably more depth than many conferences do.
The conference took a case study of one hypothetical hedge fund called Albatross, and dealt with its full life-cycle, from launch to demise. The poor investors of Albatross, managed by a Mr Albert, had significant problems to contend with after a reasonable start.
The climax of these came after a friend at his prime broker, Trade It Inc, tipped Mr Albert off about a potentially lucrative prospective PIPE deal in an oil and gas exploration company, Dig Deep Inc. Mr Albert, his fund’s performance a little wanting, uses his insider knowledge to achieve some quick returns. The SEC catches wind of his trade. The rest has all the inevitability of a Hollywood romcom.
Over the course of the day the various stages of the fund’s life cycle were dissected by auditors, administrators, independent directors and lawyers, as well as the Cayman regulator. It was a very instructive insight into the different roles of the various service providers, at what point any of them take responsibility for the fiasco, and at what point they believe they would have detected the problems.
The answers to these questions, by the way, are that most of them would detect problems pretty early. Probably. But there was generally less enthusiasm for accepting responsibility if and when they didn’t.
Of course, it is the fund manager, or advisor, that has committed the sin, in this case a criminal offence in all probability. There is only so much you can do when someone acts with criminal intent.
An interesting debate came up in the talks regarding the fund inception stage over what level of flexibility to have in the fund’s offering memorandum. Everyone agreed problems that come up later are much easier resolved if the means of the resolution are written into the OM. These problems needn’t be anything criminal such as the Albatross situation, but can be an unfortunate instance of a legitimate trade gone wrong. A provision for a sidepocket, even if the use of one is not actually intended, is such a precautionary measure.
The problem is managers are often hesitant to alert the investor to the possibility of failure by making such a provision, or unwilling to envisage their own failure from a more personal perspective. So though the lawyers say they often recommend making such stipulations in the OMs, managers decline, preferring to provide only details of the fund as it intends to trade. If they write some flexibility into the documents it is more likely to relate to the strategy. Otherwise, if they need to make alterations down the road, they will worry about it then.
In a way it is understandable that managers are loathe to entertain thoughts of their own failure at the outset of the fund’s life. They should get over this though. Investors should help them with this by investing in funds with structures in place that will allow a quick and easy resolution if things go wrong. Everybody should see this in the same way people see stop loss limits: you are not showing a lack of faith in a trade; you are taking a sensible, precautionary step. If more funds have such systems in place it will be easier to enforce a level of damage limitation in instances where something does go wrong, and that can only be good for everyone.

The issue of how long an expat can stay in Cayman seems to be more fraught than I initially supposed. Yesterday I met a couple of Americans, one a government employee, the other a public sector worker in a not insignificant role. They have been on the island coming up to the seven years allowed. After this it is possible to apply for a one year extension, they said, if they can prove they are key workers.
The government employee was confident of qualifying for this status, but the public sector worker was less confident. Assuming this hurdle was passed, the following year they could apply for residency with permission to work, which would give them a longer term right to live in Cayman. Qualifying for this requires evidence not only that you are a key employee, but that you have done charitable work on the island, for example, that you have invested in local property and that you have joined other associations. There is a points system, and anecdotally, I hear it is not an easy test to pass.
The point of all this is that it is said the stringent rules regarding foreigners is discouraging some from moving to Cayman. People are apparently increasingly reluctant to consider moving to an island for a stretch of five or six years if they feel the option of putting down longer term roots is not there. Previously many came to the island with an open mind, and many left after this period anyway. But the choice was a part of the package. Some people moving to Cayman fall in love with the place, have children who go to school here or form other attachments through friendships. For them, ejection from the home they have made for a considerable period of their lives constitutes a form of cruel and unusual punishment.
I saw no evidence of service providers struggling to fill roles on the island, but heard several times it is getting harder to fill roles with experience from oversees, and it is not because the sea or views are losing their splendour. Admittedly I heard it argued the other way too.
For those of us who came on a much shorter term ticket, all business trips must come to an end. Ahead of me I have the arduous flight that no doubt plays a significant role in the relatively modest number of fund managers that make it out here for board meetings. Say what you want about the London tube, but at least it is a short, sharp shock of a journey, an intense burst of unpleasantness. The 13 hour flight, including a long stop-over, is a more low-intensity and sustained assault: travel’s answer to Chinese water torture.
I am looking forward to getting home. A Valentines Day reunion with my wife after a ten day absence has an appealing romantic feel. A business trip to Cayman has an undeniable appeal, I count myself lucky to have spent this time here, but I miss London and the comforts of home.
Though I wonder if I will see things differently when I am sitting in my office tomorrow…

I am not much of an animals person. I am never tempted to dig deep in the name of Save The Whales or the RSPCA. There are other charities out there I find more inspiring, though I recognise them as good causes. Extinction is sad. That was a terrible business, with the dodo. The last thing I want is to compound the misery of future generations by allowing other animals to follow in its footsteps. Especially where it is as a result of human activity, but even where species are struggling with no extra help from us it seems worthwhile to do what we can to preserve the diverse tapestry of earth’s offering.
When it comes to industrial Darwinism, however, I am less accommodating. And in the last 24 hours I have come across a specimen that is surely as ripe for extinction as any rare beast you could find at land or sea. It was American Airlines, and my first experience with that most blighted sector, the American airline, though to be fair this carrier has had less problems in the past than some of its rivals.
American Airlines is like a bat at some former stage of evolution, where its ultra-sonic hearing has not yet developed. It looks like a bat. It flies. But it spends its whole time crashing into bell-towers and getting lost. It is not worth saving this creature. Its more advantaged, recently mutated cousins have developed a wondrous new form of navigation. Hope for the species lies elsewhere.
Such, I propose, is the case with airline carriers.
My troubles with AA started when I boarded my connecting flight at Miami. I have problems sleeping on airplanes. My solution to this for overnight flights is to drink a few glasses of red wine, then one or two more, and that sends me to sleep nicely. At Miami I had set the ball in motion with a few glasses, I was set as I got on the plane: watch the first movie, eat the dinner and drink a couple more glasses, then nod off. Try to get to sleep early so I wake up in London time having had some shut-eye.
The problem was there was no alcohol being given out complimentary on the flight. It was $5, but I had used all my dollars up in Miami. I am a dollar bear, and I have no plans to return to the US any time soon, so it didn’t seem worth bringing them home. So I was out of luck, and any chance of sleep on the flight, was gone, though at this stage I wasn’t giving up.
I know this is an overreaction but there is a principle at stake here for those of us who travel in economy. Besides budget airlines, (which I have no problem with: they are short flights, great value and you know where you stand), I have never encountered an airline that wouldn’t give you a few glass of wine. BA, all the many European airlines I have used, as well as Qantas and Emirates, all give it out without fuss, especially on long-haul flights, in my experience. When I came back from Bermuda last year on BA I was given two bottles in the first instance, without asking (perhaps I looked in need) and then she came back 30 minutes later to offer me more. That’s what I call the world’s favourite airline.
AA is also a carrier that does not carry eye masks for those in need of assistance sleeping. It does not put out water or other drinks for those in need of refreshment well into the flight, another area in which it compares unfavourably to Emirates, Qantas, BA and other carriers I have travelled long flights with. Elsewhere there is often there are an array of biscuits, juices and sodas available complimentary. When I was forced to approach someone to ask for water I was given a small tub containing 120ml of water.
It just seems to me in such a competitive market, and with the troubles some of the industry’s big names have had, they could be doing more on the customer services side. This applies to all industries, including the hedge fund services firms I have been meeting in Cayman. It is recognised by many as an area on which they compete, and it is imperative to be strong in this area.
AA has turned its customer services attentions to instructions to passengers on what to do when they get off the plane, hedging the risk the signs in the airport are insufficiently clear. They have detailed maps of where to go to collect your bags so you can simulate your journey through the airport while still in the air, closing your eyes to ignore the clear signposting if you so wish. It’s a novel diversion for those not interested in looking out of the window during landing.
As with service providers, customers have to vote with their feet, and to be fair, despite my outrage, the plane last night was full. For my part I will be inclined to take my business elsewhere in future where possible.

The All About Alpha blog yesterday ran an interesting piece looking at ‘alternative beta’, a term that has been floating around for some time, and the implications the concept has on fees.
Alternative beta is essentially the notion that much of what is in the industry is not alpha at all, but beta, correlated not with an index with which we may be familiar, such as the S&P500, but with things such as coffee prices, the Hang Seng or the Russian Government Bond Index.
I have heard it argued that almost all hedge fund strategies can be seen over time to correlate with one index or another. The key is to find to what a fund, or strategy, correlates.
The issue comes up mainly when talking to academics, in my experience, or occasionally fund of hedge fund managers, who can then argue their own skill is to select a portfolio of diversified alternative betas. I.e. they are still doing an important job that deserves to be well remunerated.
The concept fits in very well with the current prevailing wisdom in the hedge fund industry: hedge funds are not about delivering high double digit returns anymore, so much as offering diversification for a portfolio. Many hedge fund managers would consider themselves to have done a good job posting 8% returns if the S&P has delivered -2%. Neither do they expect to be reprimanded when the S&P delivers 12% and they deliver 8%.
It is true the idea of alternative betas must have some implications on hedge fund fees, and there needs to be debate about this. In a world of alternative betas, you would expect a management fee, ideally a reduced one, but the real debate must be over the performance fee. Even if you accept hedge fund strategies are correlated to alternative betas, to reject the presence of skill is to go too far. The performance fee serves a purpose. Incentives for managers are good for both the manager and the investor.
Hurdles are also a good idea, further protecting the investor from paying for returns that could have been achieved for free via an index. With this in mind the only hurdle that makes sense is an index. The ‘alternative’ aspect means managers can be creative with which index is used to measure the performance. This will also help to guide the investor in creating a well-balanced portfolio of alternative betas.
Having said all that, it is ridiculous to expect hedge fund managers to volunteer to cede fees, especially when most believe there is a greater level of skill in what they are doing than in long only investing.
It becomes increasingly evident there is something to this alternative beta label in months where hedge fund strategies correlate, like last summer. Even most hedge fund managers will admit that alpha is an overused concept, that there are so many managers out there trading ‘hedge’ strategies that many of them cannot actually be adding alpha. Much harder to find is one who admits this about himself.
Hedge fund fees are all about supply and demand. It is the investors job to identify where there is real alpha and where managers are supplying alternative beta, or, in some cases, just beta. A fund manager once told me he believed hedge funds would never compete on fees, no matter how much institutions complain about high fees, because a reduction in your fees would be tantamount to admitting you are not the best, or in the top bracket of your strategy.
If this is how institutions interpret such a move then the manager is right. Yet if institutions buy into the concept of alternative beta it opens the door for competition. If an institution accepts it is probably already getting alternative beta it follows they can switch to someone not claiming to offer high alpha, who offers to manage their money for less. It would then be up to the investor to ensure the alternative betas of his various managers were diversified amongst themselves.
Side letters complicate the issue. Currently many institutions are already getting in with favourable terms, but in such a way as to not exert downward pressure on fees overall. This practise makes sense for the very biggest and best managers who are delivering alpha. Yet if managers competed on fees, siphoning off some of the demand, managers of top-tier hedge funds may be able to resist the demands for side letters from big pension funds.
There are clearly managers out there that have a phenomenal skill as stock-pickers in longs and shorts, who can deliver good, positive, absolute returns- positive returns regardless of market conditions. There are many other managers that deliver returns that are dictated by the fortunes of the strategy as much as, if not more than, their own personal abilities. This does not make them worthless. To identify a manager as in this bracket need not rule him out as a potential investment opportunity. But for him to be taken seriously he does have to reduce his fees.
Investors, especially institutions, need to take the first step. While institutions continue to demand alpha, investing exclusively in hedge funds strategies they believe do this, and at the going rate, no manager in his right mind will claim to be anything less. If they accept they can achieve diversification from alternative beta and look for cheaper funds delivering this, managers will appear to fulfil the demand.

There is always a lot of talk about whether hedge funds “are over,” have “had their day” or whether “the smart money is getting out”. It’s a never-ending (and I believe delluded) debate, at least since I started writing about the industry.
To put this into context, Daniel Gross writing in Slate’s Moneybox column on 13 Febuary, observes “…our next bubble is already here, and it's … hedge funds.” To recap for those who have not read it, and to summarise (and therefore, to be fair, not do the arguments their full justice) there are five warning signs: increasing public involvement (hedge fund IPOs); increasing public involvement (widows and orphans); experienced investors getting out; increasing public involvement; and evidence of increasing public involvement on television.
When you put it simply like that you start to see this is not as comprehensive an argument as it might originally have looked. Just to clarify, most of these points are different ways of saying the same thing: there are more ways in, more people are getting in, the fact there are more people in it means it is referred to on television. Are these necessarily signs of a downturn? Admittedly, this growing popularity can be evidence of a bubble, such as technology stocks.
There are certainly a lot of hedge funds launching, many of which add no value. There is certainly a lot of naïve money coming into the industry, people investing money in things they don’t understand, who are not capable of conducting the necessary due diligence. And many of these people are probably going to lose money.
There might be some consolidation. As people realise they are not making money on their investments, or that any money they are making is being eaten up by fees, they may withdraw. You can certainly make the case there will be a reduction in launches and an increase, perhaps a fairly dramatic one, in closures; that there is an unsustainable number of hedge funds around.
The case can be argued equally easily the other way though, that institutional involvement is only just beginning, and there is trillions more dollars of pension fund money waiting to come in over the coming years.
Let’s back up. The first thing that occurs to me when I read The End Is Neigh For Hedge Funds story is that someone may have failed to grasp what hedge funds actually are.
Definitions of hedge funds are notoriously difficult to pin down, but essentially they are unregulated investment vehicles, where access is restricted. Admittedly this latter point is being broken down to a certain extent through funds of hedge funds and through indirect access via institutions. But the important point is the unregulated part. Hedge funds have greater trading flexibility, and can therefore take views, and put on trades that many other funds are unable to do.
This begs the question, why would people leave hedge funds in their droves? Will they wake up one morning and think: “Hedge fund x is not working out for me. What I need is to invest in a more regulated entity?” This is probably overstating the point, there are other things people can invest in that are as sexy as hedge funds, like private equity, venture capital or emerging markets. The point I am making is that hedge funds get treated like an asset class, but they are not. The term is a broad (arguably too broad) one that encompasses a variety of different strategies, or managers who trade in completely different ways.
So are the experienced people really getting out? I think money is moving out of some strategies and moving into others, though it is hard to say for sure. The make-up of hedge funds is changing. New strategies are evolving, old ones are declining. In some cases the industry is morphing with private equity. Lock-ups are changing. The way hedge funds charge fees is already becoming more creative, and is likely to continue to change.
None of this spells the end of hedge funds. The term bubble is inappropriate in this context. Hedge fund performance will not disintegrate indiscriminately, a la tech stocks in early 2000, where the good and the bad sank alike. What may happen is strategies will become crowded and their fortunes will fade, as occurred with convertible arbitrage, (although as the crowd exited its fortunes miraculously improved). Hedge funds will change as investors become more savvy and demand better value for money from certain managers that are not delivering on their promises.
Its time people stopped talking about hedge funds as an asset class and started to look a little more under the hood at what some of these funds are doing.

An article in the New York Times yesterday revealed activist hedge funds are not actually bad for long term investors after all, as has been believed in some quarters. Because many hedge funds have relatively short holding periods, compared to institutional investors or private equity companies, it seemed to follow they must be in it to make a quick buck. And it seemed inconceivable that a quick buck could be made without it being at the expense of those sticking around.
The article was reporting on a study called Hedge Fund Activism, Corporate Governance and Firm Performance, written by Alon Brav, Wei Jiang, Frank Partnoy and Randall Thomas.
To me it always seemed perfectly obvious. A hedge fund sees a company with a good overall business that has structural weaknesses which can be remedied to improve the company’s fortunes quickly. Experienced investors with time and resources to research all the angles, with a detached perspective, are able to spot solutions that may be harder to see from the inside. And they are able to build voting blocks to affect change that individual investors, and even institutions, will struggle to achieve.
Traditional investors worry hedge funds make short term changes that will have little or no impact on the long term prospects of the company, or even have a detrimental impact. If the impact has little or no long term impact then the fund has done the institutional investors no harm in making a quick profit. If the short term gain in at the expense of long term performance, for example the removal of management that were putting in place improvements that would take months or years to materialise, there is a good argument hedge fund activists pose a threat to other investors.
Instinctively I feel this is rarely the case. There are real improvements that can be made that bring around short term benefits, but these do not have to be at the expense of longer term goals. This study bears out that view.
As the boundary between hedge funds and private equity blurs, and more funds put in place longer lock-ups, as many did after the SEC first introduced its registration rule, there will be even more incentive for hedge funds to improve performance in the longer term.

All hedge fund investors have many decisions to make regarding how they will select managers. One minefield to be negotiated is the compromise required between finding established managers that have proved their worth and young, motivated managers, with less of a track record but more of a point to prove.
There is no easy answer.
I was recently reading a book called Hedgehogging by Barton Biggs. It is interesting reading for who haven’t endured the launching of a hedge fund, capital raising efforts and worrying obsessively about a portfolio, unable to concentrate on a story your wife is trying to tell you about a conversation she had that afternoon with the neighbours.
One of the most interesting points in the book concerned exactly this: the ability of an individual to maintain the passion and hunger for success that brings him into work at six in the morning and keeps them there till after eight at night.
The point was illustrated by a conversation amongst a group of Biggs’ colleagues, at various stages of their careers, over lunch at a golf club.
(Biggs notes- and as a lowly journalist I have to take his word for this- the mythical status of golf amongst hedge fund managers, and the status symbol that a good handicap can become.)
There were managers at the table, generally the more successful ones, who said they would trade basis points on the performance of their funds for lower handicaps. Others, the younger and hungrier ones, retained the obsessive interest in their funds’ performance. It was this obsession that got the older managers to where they are.
At a conference I attended several months ago I heard one investor recall his own, alternative stop-loss mechanism: he would not invest in any hedge fund where the manager owned a boat. The theory being anyone with enough time on their hands to enjoy one probably isn’t spending enough time in the office to justify a multi million investment. It is a similar principle.
There is plenty of evidence from academic research to support the theory younger hedge funds (as opposed to hedge fund managers) perform better than established ones, though here there is a huge survivorship bias built in.
When making allocations of multiples of millions or more it is natural an investor wants to see evidence of ability. I do not think I could bear to part with such a large sum of money without seeing a track record, despite what research says.
To an extent the answer, as with everything else, lies with due diligence, but this will not reveal who is starting to get distracted by the fruits of his labours; as Biggs would say, pining after a lower handicap.
If anyone has any further solutions to this conundrum I would be very interested to hear them.

Brendan Barber has provided the latest chapter in the ongoing debate regarding city wages. It’s an interesting and extremely difficult issue and one in which my head says one thing and my heart another.
My heart agrees the widening gap between the best and worst off is a terrible thing. Fund managers do a highly skilled and high pressure job, but I doubt the difference between this job and others is as great as salaries would suggest.
Barber cited The Economist: “A poisonous mix of inequality and sluggish wages threatens globalisation.” He said the share of capital going to labour is at historic lows while that going to capital is at historic highs, and noted warnings from many quarters that there could be a challenge to the current system at the ballot box.
My head wonders what can be done about it all. There are always unintended consequences when things are changed with a view to making them better. As Richard Lambert, director general at the CBI pointed out last week, any clumsy attempts to curb salaries of the top earners in the city could "kill the goose which is laying the golden egg."
In a world governed by the forces of supply and demand, as our world is, those who feel they could earn more being elsewhere will surely move. The only way hedge fund and private equity pay could be capped in a way that would really benefit the poorest would be if there was a high level of international cooperation on the issue. Such a high level of cooperation as would be required is difficult to envisage.
Therefore, the only thing you could see happening from a UK assault on city salaries is the demise of the City of London. Barber asks: “How much of the City’s tax actually ends up in the Exchequer as opposed to being squirreled away to the Cayman Islands?” Doubtless much of it does get squirreled away, but the state still receives a lot of money from the City. Lambert asserts it generates around 20% of all corporate tax revenues in the UK.
The dangers of trying to create a system that appears more humane, with a greater distribution of wealth and increased job security, are evident in parts of the continent where growth has been sluggish. Many are looking at ways to dismantle or adapt “the cherished social model ™” to create a more dynamic and competitive economy.
It would be wonderful to live in a world of greater equality. But in this instance I fear taking away from the haves would not benefit the have nots, but rather stifle incentives and overall production.
But Lambert was right to say the City needs to do more to communicate the advantages it brings to other parts of the country, either through charitable work or generating further employment, to defuse the resentment clearly being felt by many struggling to make ends meet.

I sometimes view the world as comprising two types of country: those competing for hedge fund business; and those competing for hedge fund servicing and domiciling business.
To be fair there is another category of countries that have little interest in hedge fund business, but I just see this group as behind the curve, waiting to get in on the act. Hedge funds are like tourists: people might complain about them from time to time, but when the chips are down everybody wants a piece of the action.
The other similarity between the hedge fund industry and tourism is the very literal one, that many of those in the second category, of jurisdictions set up to act as a hedge fund domicile and servicing centre, regard both these businesses as crucial legs to their island economies. Travel to Malta, Gibraltar, the Isle of Man, Bermuda or Cayman and you hear similar arguments, though at different stages of maturity. Both tourism and hedge funds are crucial to their well-being.
The more interesting, emerging competition is in the first category of hedge fund centres for the day-to-day management of the funds. New York has long been the centre of gravity in this respect. London was always the Robin to the Big Apple’s Batman. Now the picture is getting increasingly more complicated. There are a host of new superheroes itching to burst onto the scene.
In the FT today, the financial services minister of Japan, Yuji Yamamoto expressed concern over a lack of diversification in its economy. Japan plans to entice more hedge funds and other financial business into Tokyo, with its own answer to London's Canary Wharf.
Asia is at the centre of this fight. The US and European timezones are largely covered, but it is east where the main business is up for grabs. Singapore and Hong Kong have been slugging it out for years to be the region’s number one hub. Tokyo already has a lot of hedge fund business. Dubai is setting itself up as a financial centre, though arguably one that will compete more with the likes of Dublin and Bermuda than London and New York. Hedge funds are also growing fast in Australia.
This comes back to the debate about executive pay, and the blog on Wednesday. Many of these places make very interesting alternatives to London as a place to work, especially from a lifestyle perspective. (I have long been agitating to become the Hedge Funds Review Asia correspondent, based in Sydney.) It highlights the dangers of London decreasing its attractiveness as a financial centre, just as others are looking at ways to win more business.

The President's Working Group on Financial Markets “awoke from a seven-year slumber yesterday and decided it was time to do something about hedge funds and private equity,” according to Tim Iacono’s blog. Only he was being sarcastic. Actually what has happened is that the regulators have failed in their duties of investor protection yet again to allow those pesky hedge fund cowboys to ride roughshod over the innocent. Yet again. It was, Iacono explained, “cognizant of the danger in attempting to fix something that is not yet clearly broken.”
But isn’t it clear it is broken? What about Amaranth, I hear you cry. Something must be done. Only Amaranth is evidence the system works. The market took the debacle in its stride. For every loser in the fund’s meltdown there were winners. And such events are likely to serve as key milestones in the process of investor education, which is what really lies at the heart of all this.
Investors should look critically at funds, at the risk they are taking and the transparency they are offering. The risks being taken at Amaranth were there for investors to see, only most were mesmerised by the returns. But even here, most have got a decent sum of money back, so it’s really a very happy story.
At the other end of the debate is the question of minimum investments and at what level to set the bar of ‘sophistication’. Many Americans who previously qualified for hedge funds and will be excluded when the threshold is raised to $2.5m have been bombarding the SEC with complaints and accusations the poor are being excluded from a means to achieving superior returns.
They have a point. But for the self regulation model to work it has to be this way. It is vital to keep retail investors out of situations like Amaranth.

I want to continue yesterday’s thoughts about regulation and the outrage some retail investors feel about being excluded from hedge funds as the threshold for accredited investor gets raised.
The difficulty is in creating a one size fits all approach to such a diverse industry, appropriate for “retail investors”, spanning the uninformed, the gullible and the litigious, through to those who could be argued to be sophisticated, even if they are not necessarily wealthy.
It is meaningless, as I have mentioned before, to speak of hedge funds as an asset class. But one thing that binds them together is their regulation, and the desire of most of their managers to remain as lightly regulated as possible.
It is often counter-productive to over-complicate rules with exceptions and add-ons: to separate out retail investors the regulations for hedge funds would end up looking like the UK tax code, and you’d end up paying 10% fees for lawyers to decipher them. But as hedge funds are increasingly used not to take high levels of risk and chase outstanding returns, but to diversify returns as part of a broad portfolio, it seems unfortunate to exclude the individual retail investor.
There was some talk some months ago about a form of regulation which separates funds out and categorises them according to the risks they are taking. Funds with higher levels of volatility could be given different treatment to those with very low volatility, with different minimum investment thresholds, requiring different levels of sophistication, or wealth.
The problem is volatility levels can themselves change, and there is no guarantee a fund’s performance one year will be representative in future years. The assessment would have to be made on the strategy, not on the returns, and regulators are always a step behind fund managers, so too often the regulation would be moulded to fit yesterday’s issues.
Any aggregates set between the different levels would be very arbitrary, and be likely to cause as much consternation as the levels currently set for minimum investments.
It would also do nothing to rectify the fact currently the relatively less well off have no access to some high performance strategies, though there are plenty of emerging markets and small cap funds that are open to them.
The most important issue, however, is that hedge funds are unlikely to want this kind of regulation because it limits their flexibility. Any moves to make them more appealing to retail investors are likely to be received without enthusiasm. Retail money is not sticky.
The good news for retail investors is evidence suggests they will get their exposure to some of these strategies through a different route, as long only funds become more exotic. Already UCITS III funds can replicate a long/ short strategy using derivatives. An investor with a taste for risk can get access to a Russian small cap fund, for example, or any number of vehicles with a volatility that could match any hedge fund.

Days like yesterday, when the markets get decimated, emphasis the separation of journalists and those in the industry we cover. Yesterday was a quiet day for me. I spent most of the day lost in the notes from Cayman, deciphering my handwriting and pondering my supplement flat-plan. News the FTSE, S&P and many other indexes had tumbled by their biggest amounts since 9/11 in some cases, but at least since last June, seemed a little unreal, although it will seem more so when I check out the value of my ISA.
Nobody needs me to tell them what goes up must come down. The high levels of optimism recently have been surprising for me. As a student of history I tend to have a view of the world dominated by the mantra that life repeats itself in endless cycles. The bear leg of this cycle has been a long time in coming, and there is nothing to say it is about to start now, just as it did not in May and June. If we do see a period of increased volatility hedge fund managers should take the opportunity to use their extra flexibility and skill to convince investors they are worth their fees.