Revolts against Hedge Funds

The storms by private investors particularly in the USA,  against hedge funds is pleasing to behold though sadly is likely to end in South Sea Bubble-like tears for some at least.

The private investors have gathered together using internet sites, to pile into company shares which were being hugely profitably, shorted by hedge funders. Shorting is in my view simply betting and should be limited to betting shops. Following the collapse of the Lehman Bros bank I blogged about this on more than one occasion, for example saying in 2011 about the shorting then of an oil company:

For example if an ordinary person (private investor or "PI") wanted to gamble on EO. share price falling the PI could as a consequence of the financial whizz kids' scheme, use EO. shares belonging to someone else and agree to sell them now at today's price for delivery back to the true owner  in say 2 weeks time. The shares would have to be be bought back usually through an intermediary) in two weeks and the expected  lower share price then would give the shorter an handsome profit. As it can be so much cheaper to short shares  than to buy and own them, often the sheer  weight of shorting can give the share price a downward momentum even where the company's financial fundamentals are healthy, to the serious disadvantage of those who invest in rather than bet on shares .

 Added to this is the possibility that financial wizardry makes it possible for such practices to be financed purely by borrowing, thus making it far cheaper to deal in  shares you don't own than to buy with real money and own the shares personally. The true owner of the shares whose best interests obviously lie in  in the share price going up, would thereby unwittingly and unknowingly have his shares used to  enable  a stranger to  bet that that their price would fall. The outcome then would be that the stranger has made his profit by using the owner's shares after which the owner (usually none the wiser as to why) holds an asset worth less than before the stranger became involved.

A difficulty is that when the financial climate becomes tough, the intermediaries who make  loans to facilitate  gambling in this way, call in their loans resulting  in many people trying to cash in their positions at the same time. The eventual outcome is the plummeting share prices witnessed on TV screens worldwide, based not on the underlying value of the companies like Encore Oil but simply upon betting on shares suddenly being made more difficult/expensive and everyone rushing for the exits simultaneously.

The recent startling successes of the private investors has caused some hedge funders to lose well over $4billion though as stated above the private investors involved need to  take extreme care; I would not  like to be involved in such operations at all.

Typically the institutions have  thus far acted really to assist the hedge funders, by for a while preventing trades  in the affected stock. Indeed for a time, my personal, normally very efficient and cheap broker (AJ Bell) seemed to require all trading to be effected by telephone rather than by its usually simple automatic on-line route. Possibly though that temporary problem was caused by large numbers of people joining AJ Bell which has been my broker for many years, to join the USA  people playing the hedge funds at their own game.

A point which would if my pension was not already being  paid, cause me considerable agitation is how pension fund operators in the UK  are content to allow hedge funds to use some company shares which are supposedly being held for  pensions fund to enable pensions to be paid in the years ahead,  for the purpose of shorting. Dreadful in my view as if the funds are holding such poor company shares in the first place, they should sell them make more profitable investments rather than let hedge funds play them. Any fee paid by the hedge fund would be small compared with the losses caused to the pensioners.

Some pension fund trustees may be volunteers looking in only a few hours each month but  almost all  sizeable pension funds will have highly paid professional fund managers. Additionally whereas pension funds may have  forums (fora?) for members ie prospective pensioners, to complain, what is really needed is for the matter of shorting and allowing hedge funds in, to be put to the vote by  members. 

If  pension fund investing was all carried out by men only, there would be a vote  by the prospective pensioners to allow women in to invest the pensioners' money profitably,  even if the government did not act first.

Thus; if the pension fund managers and trustees wish to preserve the ludicrous status quo, there should votes of members to determine firstly whether  they approve of their pension funds being used in this way and  secondly whether they are content for their pension funds to hold shares in companies which are such poor investments, that hedge funds wish to make large sums by borrowing them to short.

After all what is the real purpose of pension funds?