2007 - 2020

On Bankers, Hedge Funds and Dodgy Feeds

We live in a world where some hedge fund mangers earn more than entire nations. The general election was a victory for those that benefit from economic chaos argues George Kerevan in his weekly economics and corruption column.

GE19: A VICTORY FOR THE HEDGE FUNDS

WHAT does the Tory victory in GE19 bode for the economy? This column has long argued that Brexit is the agenda of a wing of British finance capital led by City hedge funds – Boris Johnson is their political mouthpiece. The Hedgies are a bunch of billionaires (homegrown and non-dom oligarchs) who invest mostly in short-selling shares, bonds or currency; i.e. betting on economic failure.

Like Boris’ mad goffer Dominic Cummings, these Del Boys mostly originate from outside the charmed circle of the Oxbridge and City Establishment. Driven by greed and a gigantic chip on their tailored shoulders, the financial Del Boys thrive on economic chaos. Politically, they have an extreme, anti-state libertarian view of the world and hate EU regulation with a vengeance. For them, GE19 was therefore a political and economic dream come true.

To get Boris his majority, the Hedgies shelled out a fortune in financial subsidy to the Tory Party. For instance, arch Del Boy Johnathon Wood (see ‘Boris, Brexit and the Hedge Funds’, Bella 22 July 2019) was quick to pony up with an extra half million to Tory funds.

David Harding, of the Winton Group, donated £200,000 – chickenfeed for Harding, who gave £100m to Cambridge University to recruit science and maths PhD students, so hedge funds can earn even more cash. There was another £100,000 from Michael Farmer of the Red Kite hedge fund and a member of the Conservative Party Board.

Interestingly, another £200,000 donation to the Tory election campaign came from the improbably named Yan Huo (fireworks in Chinese). Mr Huo runs one of Europe’s largest hedge funds, Capula Investment Management, headquartered in Mayfair, London. It raises working capital – around $13bn – from wealthy individuals around the world plus US investment banks like Goldman Sachs. Of course, as is typical of a hedge fund, Capula routes much of its business through the Cayman Islands tax haven.

SCIENCE VERSUS THE ESTABLISHMENT

American-born Yan Huo’s patronage of the Tory Party adds new knowledge to our understanding of how the hedge funds, Boris and Brexit fit together. Firstly, Huo graduated in physics from Fudan University in Shanghai before getting a PhD at Princeton in 1993. The big Hedgies tend to have a science background, like Michael Farmer and David Harding mentioned above. This further alienates them from the pro-EU Establishment and City types who are typically generalists and classicists.

Note: Dominic Cummings also has an animus towards Civil Service generalists. He constantly blogs about the necessity to get more scientists and “scientific thinking” into government policy making. We should not take this at face value. True, the Oxbridge cult of the amateur and “all-rounder” has produced soporific, incompetent public administration and economic management in the UK. But then its main purpose is not to promote “efficiency” but rather to infect public administration with a uniform ideology that ensures bourgeois continuity and conformity in government.

The Hedgies, on the other hand, represent a new wing of British capitalism which abhors continuity and conformity. Instead they seek an ideological, libertarian break with the past. This is the heart of their populism and radicalism. Their science and maths backgrounds are not accidental. They have a mindset which rejects cultural fudge – the sort of ideological fudge you need to homogenise divergent political streams in order to avoid revolution. But the Hedgies actually want a revolution – economic, political and social – on their libertarian, pro-market terms.

It is not that they are any “brainier” than the Oxbridge generalists. Often the Hedgies ended up doing science degrees precisely because they were less able. But they lucked in when the financial sector discovered derivatives (i.e. linking the price of one asset to another, and betting how they move against each other) in the 1990s and needed to recruit guys with maths degrees. Often from humble backgrounds, these geeks soon found themselves making fortunes. In the Noughties, they went further and simply took over the financial world. Now billionaires, they are bent on taking over British capitalism lock, stock and barrel.

As the City of London is still the place where all the cash is – and where financial regulation remains (contrary to the hype) superficial and niggardly – so the hedge funds have set up shop. Now the Hedgies have bought the Tory Party, Boris and the British government. They will demand – and receive – a reward.

NEIL WOODFORD DEBACLE

Which brings us to former darling of the City, Neil Woodford, who fell from grace earlier this year when he was forced to suspend his investment fund – once worth more than £10bn – after investors tried to take their money out when the value of the fund started to plummet. Woodford’s fund invested in assets that were difficult to sell off quickly, making it vulnerable when investors tried to withdraw their cash.

So what?

Woodford is another Del Boy financial trader from a non-Establishment background. In the Thatcher years and afterward, he earned a reputation as the UK’s most savvy investment manager. Success went to Woodford’s head and he set up his own investment fund in 2014. That fund has now gone kaput because Woodford invested in very long-term bets that did not deliver.

These included a large stake in a tech company called BenevolentAI. At one point, this company was valued at $2bn. When the value collapsed so did the value of Woolford’s investment on behalf of his clients. Founded in 2013, BenevolentAI aims to perfect data-mining software that can comb vast troves of medical data to “personalise drugs for the patients that benefit most from them”. In 2017, US pharmaceutical companies spent $71bn on developing new drugs. If that cost can be reduced by data mining, BenevolentAI could clean up.

Alas, BenevolentAI has spent a fortune and not come up with the right software. Thus, its share value plummeted, leaving Woodford having to close his fund – and Woolford’s investors lose their shirts. What has this got to do with hedge funds and Yan Huo’s Capula?

For a while, BenevolentAI seemed to be generating revenue – hence an insane market value of near $2bn. But all was not as it seemed – hence the fall of Mr Woodford. The supposed revenues of BenevolentAI were actually the revenues of companies it had purchased with paper shares. BevevolentAI had to keep on purchasing other firms in order to keep revenues seemingly growing, to keep its share price rising. (This is called capitalism.)

One of the firms acquired by BevevolentAI was another data-mining company called Adarga. Bristol-based Adarga focuses on software to huge quantities of data superfast – say if you only are only a few seconds ahead of the financial markets with proprietary information and you want to trade in the financial markets.

Companies like Adarga crave mathematical geniuses – so-called quants. One such is David Gu, formerly chief investment officer and partner at Yan Huo’s Capula hedge fund. In 2017, Mr Gu left Capula to become chair of Adarga. Gu graduated in computer science from Columbia University but made his fortune in trading currencies in London. He is the picture-perfect example of how hedge funds and big data are combining to take over the world – or at least the Tory Party.

EASE-DROPPING ON THE BANK

Lest you think I’m being a trifle paranoid consider this: The Bank of England has just admitted that an audio feed of Governor Mark Carney’s press conferences was leaked on a regular basis to London hedge funds prior to being publicly broadcast. The Bank said one of its technical suppliers had “misused” the feed, which is there as a fall-back in case the public video broadcast fails.

Result: hedge funds involved in the scam had enough pre-notice to use computer-driven, high-speed trading to make millions on currency, bond and share movements. But don’t expect the Hedgies’ friend in Number 10 to do very much about it.

Comments (14)

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  1. John S Warren says:

    “The Bank of England has just admitted that an audio feed of Governor Mark Carney’s press conferences was leaked on a regular basis to London hedge funds prior to being publicly broadcast.”

    The important point that arises from this acknowledgement is that, in spite of the propaganda, nothing has changed. This follows the LIBOR scandal, the endless PPI scandal (£53Bn paid in fines by banks over 15 years), and of course the Financial Crash. The lessons from this appalling catalogue of wanton irresponsibility and abject failure of the City to protect the most fundamentally important financial standards we claim, but do not protect; is that nothing is really learned from these scandals, and little changes. This, after all, is Britain. One reason for this failure is that nothing done has crossed the threshold of illegality, because the threshold has been set so high it failed to capture anybody or anything (only with quite exceptional rarity does anyone ever spend time in prison for committing a crime in the City). The 2006 Fraud Act (think about that date for a moment), for example has failed. The solutions that British authorities produce for these disasters areminor, trivial, over-promoted, superficial adjustments to an inadequate system in a regime in which the application of a regime of fines is the general, and in most cases the only sanction. This in turn has merely produced a new source of steady revenu, but no solution to the underlying problem; £53Bn paid in fines on PPI breaches alone. This works for the City because fines become habitualised: they are not a penalty, but rather they become established as a mere routine cost of doing business. Clearly the fines are cheap to pay, which implies that a great deal of money is being made.

    What is the solution? The time is past when we can any longer pretend that in Britain today, there is one. There isn’t. The prevailing culture is endemic and non-negotiable. The only solution is to recognise that the time is up for the Union. Anyone who protests to possess any standards of behaviour at all in public life should demand the independence of Scotland. It is what basic human decency requires. Obviously.

    1. squigglypen says:

      Tell the wee woman who lives in the sink estate existing on buttons who thinks the queen is a nice wee soul and we should stick together cos Scotland’s too stupid tae run their ain country and see how far you get with independence for our brilliant country.( my research and comments come from standing at doors in the dark and rain talking to Scots and putting leaflets thro their letterboxes..sometimes getting them thrown back at me with the comment..’I’ve nae time fur this rubbish.’ Before you sob and throw yourself in the Clyde…. I was one of the many foot soldiers who helped kick out Jo…..so no’ bad then…there is hope…( Boris next)
      For Scotland!

  2. Alasdair Macdonald says:

    Although many within this financial nexus are from different social backgrounds to the previous establishment, many of the previous establishment, including hereditary landowners, are still there, because, as they have done over the centuries they have been able to adapt nimbly to changing circumstances, although some were ‘ruined’. In addition, the new financial billionaire group from relatively unprivileged backgrounds, almost immediately begin to send their children to the ‘independent’ schools, such as Eton,Stowe, Charterhouse, etc and they also endow facilities in these schools which provide the kind of education and training which advantages them in the economy. For example, in the music industry and theatre, almost all ‘leading’ figures were educated in private schools. They are investing in science education in these schools.

    However, much as they claim to be supporting the ‘chill winds of competition’, the funding available for public education is gradually curtailed and the curriculum becomes narrowed.

    I was recently asked to advise a parents’ group in the London Borough of Lewisham, which had been set up to campaign for better funding. Speaking to parents, I was astounded to hear that in many schools, art, music, drama, for example had simply been cut from the curriculum, ostensibly to provide more time for the ‘3Rs’, but, although increased time had been allocated to mathematics, in only half of the periods were the children taught by qualified maths teachers. For the other half of the time, they used computerised ‘packages’, updated versions of ‘programmed learning’ and were supervised by ‘teaching’ assistants on minimum wage and term-time-only contracts. Standardised tests ruled. “Discipline’ – i.e. deterring misbehaviour – was pretty draconian and was a pervading ethos in all subjects and large numbers of children were excluded from school and, once, excluded, there was not the kind of legislation such as we have in Scotland of ensuring the right to education and of keeping track of these young people. The excluding school had no further duty towards the young persons and had no duty to report the exclusion to an authority, such as the Council, because Councils have no responsibility for education.

    Full disclosure – I have an honours degree in physics and mathematics and these subjects are, indeed, liberating and exhilarating. However, as we were all taught, they are a way of approximating what the universe is like and provide tools to enable us to predict what is likely to happen, in particular circumstances. Although they have been very successful, there is an inherent uncertainty, as exemplified by Heisinger’s Uncertainty Priciple and quantum physics. We do not know it all, nor can we know it all. However, if you enclose a system, then it can be made to behave pretty much as you wish. But, the system exists in the universe and is part of it and, eventually, the imbalance between it and the uncontrolled world reaches a breaking point.

    The financial system is such a system and assumptions about its predictability are built in so increasingly sophisticated algorithms can be made which predict how the system will react. But, these assumptions are being made which excludes the complex human behaviours of those of us excluded from the system – by laws, etc – but who actually provide most of the ‘resources’ to make they system work. Inevitably the system/model buckles as it must under its own contradictions – e.g. 2008 – but, it is not those who control the system who suffer, it is those who are excluded and gradually sink under its excrement. But, since we are told that unless we (i.e. those excluded) ‘sort’ the system, everyone will suffer.( “We are all in this together” said Mr David Cameron, but you bear the cost). So, like Gordon Brown and Alistair Darling in 2008, shedloads of public money is hosed on the financiers ” to provide liquidity”, but, in practice to “repair the balance sheets” which means that the controllers continue to get bonuses and increasingly obscene levels of remuneration.

    The ‘neoliberal’ (I know it is a vague term) paradigm is deeply established and propagandised every day by much of the media and is hard to change. Public money to financiers is ‘essential’ but ‘benefits’ are for ‘scroungers’. Divide and rule and induce self-loathing in the masses.

    1. Fat Boab says:

      Alasdair, great sum up there, put some of the technical stuff in terms I can understand. Excellent.

    2. florian albert says:

      You refer to the ‘shedloads of public money… hosed on the financiers’ by Gordon Brown and Alistair Darling.

      What they were trying to do was prevent the collapse of the banking system. Ben Bernanke was doing the same in the USA. They realized that a banking collapse would have a catastrophic impact on ordinary people. They were well aware that this was the lesson of the Great Depression. In the USA and in Germany such a banking collapse had happened. It did not happen in the UK and, as a result, the Depression was comparatively mild and short lasting here. (It was still traumatic for millions.)

      Brown’s mistake was not that he prevented a banking collapse but that he allowed a banking bubble to take place. However, this bubble was very popular for many people. It helped Labour win elections in 2001 and 2005. It also allowed generous pay increases for many in the public sector. When Scottish teachers got a 23% pay rise in January 2001, much of the money to finance it came from the revenue provided by the expanding financial services – or, more brutally, the banking bubble.

  3. Jim Hagart says:

    I don’t like to think of hedge fund mangers EARNING their massive incomes. What they are in fact benefitting from is a grossly distorted means of managing a nation’s economy and the distribution of wealth within it. They, of course, benefit from funding political parties, think tanks, spin doctors, and well funded advocates, all of whom work assiduously to distort and modify tax and other financial mechanisms in their interests. It’s little wonder this produces greater and greater disparities in wealth and income. Until some limitations are placed on the amount of financial support (often dark money) devoted to political advocacy by corporations and wealthy individuals and organisations, their funding is made transparent, and the interests of the general public are protected by the state providing financial support to those who promote civic and social interests, the disparities will simply continue to escalate.

    1. Alasdair Macdonald says:

      The are paradigm examples of ‘rentiers’.

  4. Wul says:

    Why are no mainstream newspapers publishing articles about this stuff? Why are there no prime-time TV documentaries about the impossibility of getting “Brexit Done” quickly?

    Are there no, actual, investigative journalists working anymore? How can anyone work in journalism and ignore the fact that our country is being hollowed out and given away? The scale of the theft is breathtaking.

    1. SleepingDog says:

      @Wul, Greenpeace had to set up its own investigative journalism branch, called Unearthed, because of the lack of such environmental reporting in the mainstream:
      https://unearthed.greenpeace.org/
      It is an odd counterpoint to how financialization has spread from the traditional banking sectors through other parts of the ‘productive’ economy. Perhaps it will be common for non-media organizations to employ their own investigative journalists.

      1. Wul says:

        Thank you for the link to the “Unearthed” journalism, SD. Some very interesting & shocking reading on there.

  5. w.b. robertson says:

    Re “Wul”…. investigative journalism costs time and money. sadly lacking in the media these days.

    1. John O'Dowd says:

      Re “Wul”…. investigative journalism costs time and money. sadly lacking in the media these days.

      And, the billionaire owners on the MSM , their lackeys in our ‘impartial’ State Broadcaster have absolutely no interest in having their misdeeds uncovered!

      1. David McCann says:

        I shouldn’t worry too much about our MSM, as sites like this on social media are the way to go!
        The dead tree press, which was a part of my life, are a thing of the past, and indeed no bad thing for that!

  6. James Mills says:

    …and to ensure that all is above board in financial circles , the next Governor of the Bank Of England ( sic ) has been named ; he is the present , incompetent boss of the Financial ( mis )Conduct Authority , Andrew Bailey , who has overseen ( but not stopped ) various scandals involving those same people that George has identified as ”crooks” , though not in so many words .
    So we can all sleep soundly knowing that all is well in the financial world !

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