What are hedge funds? Why have hedge funds become involved in UK politics?
To explain what hedge funds are and their involvement in UK politics, the meaning of a few other terms needs to be made clear. ‘Shorting’ is how all hedge funds make their money. Think of it in terms of betting on the horses. Hedge funds are like punters who bet on horses to lose in their races. To win these bets, they need to rig the races. So this kind of betting doesn’t exist because it is very difficult to rig the horses for long.
Shorting is the key factor. This involves temporarily hiring stocks that the hedge fund calculates will soon decrease in value. The hedge fund sells these borrowed stocks to buyers willing to pay something closer to the current market prices. Now the hedge fund needs the shares to lose value unexpectedly, even just for a short while. When they do, the hedge fund can re-purchase them at the lower cost, return the borrowed shares and pocket the difference. Of course the hedge funds can lose these bets as well. But they try very hard not to, and have in the past been able to rig the markets so that their plans succeed, sometimes with spectacular results.
Rigging markets is not, strictly speaking, cheating. It’s a bit like the professional foul in football or sledging in cricket. Nor is it always fraudulent, nor always illegal. But in our imperfect world stock prices can be heavily even of temporarily influenced by other events and activities than purely financial ones. Shares are not always a completely accurate reflection of a company’s performance; they can dip suddenly for the wrong reasons, for example when impacted by the circulation of fake rumours and news. They can recover a few days or weeks later, after the rumours have been proved wrong or successfully challenged, and once the hedge fund’s profits have been made and extracted. In this window of opportunity, millions can be made by being swift and decisive trading in an area that historically has been neither.
The key element is that the very act of “shorting” a stock, especially by a large fund manager, often sends its share price tumbling, as others notice the negative trade and start to worry and therefore to sell, and other investors have been known to pile in immediately after hedge funds make these decisions on the enhanced expectations of winning. It’s exactly as if the bagatelle board was tipped to allow the balls to drop in the right places. The organisation of this is difficult to recognise and even more difficult to regulate even though the evidence of it having happened is palpable. The ‘shorting’, which survives partly on the proverb that ‘there’s no smoke without fire’, can be done deliberately to make the share price fall even though there were no real reasons for it to do so.
Hedge funds are a bet spreading operation supported by tacit mobbing, deceptive communications and ‘fake news’. Hedge funds, of course, are mostly unregulated, pretending to operate out of tax havens precisely to avoid legal scrutiny, while being based in plain view predominantly in London and New York. They have more recently concentrated on investments in times of political turmoil, where both large profits and losses can be made. Such turmoil can be caused by natural disasters – the Japanese economy was successfully but extensively shorted days after the tsunami in 2011. The hedge investors made large profits by actions that caused a market within a market, and made the situation far worse for the Japanese government. In effect, a small group of investors surrounded an economy that had slipped and fallen, and made big profits by kicking it back down even as it tried to get up to re-establish itself. But the best periods for the hedge fund managers’ attacks are those presented by international political and economic shocks.
The Brexit referendum presented a perfect and unique opportunity in 2016. Swathed in opportunistic lies, political deception and fraud, and with propaganda directly and often illegally funded by several prominent hedge fund managers, the referendum outcome provided investors with the certainty of several years of national economic decline in the UK. The UK economy was being shorted by an argument, successfully proposed and prosecuted, that the UK could do better out of the EU than in. While it can legitimately be argued that this was a matter for discussion, those who proposed it knew that it was a lie designed to appeal to those who knew no better, especially when cloaked in the mirage of becoming a sovereign nation ‘again’, but it was proposed by those who knew that they would make profits from the successful propagation of the lie, There were many who bet on what amounted to the expectation of economic failure, including several sitting in plain view in the Conservative government’s cabinet. Ironically, the sudden appearance of the unforeseen worldwide pandemic of Covid has providentially front-loaded the promise of economic decline in the UK over the next few years. Covid will provide an excellent mask for all the failures and all the corruption. Ministers have already started repeating this mantra over last year’s scandalous PPE supply situation.
But hedge funds did not have a successful year in 2020. The fruit machine lurched alarmingly as national governments found the magic money tree and spent record amounts of future money and turning quantitative easing into an avalanche. These developments were unforeseen by all at the start of 2020, but they have reduced the lucrative opportunities for short-selling. Average hedge fund returns have fallen from around 18% a year during the 1990s and 2000s to around 3% in the past year, still a healthy return, while current performance this year is markedly improving.
Since hedge fund managers survive best in conditions of chaos, they have extended their bets by taking on whole governments. This explains the explicit support of US hedge fund managers for Donald Trump and his economic policies. UK hedge fund managers piled in to support Brexit, irritated by the competition posed by the quantitative easing that started from 2008 and outraged by the EU’s new Alternative Investment Fund Managers Directive which restricted hedge fund operations, although in practice there are few such operations outside the UK since European regulation has successfully restricted hedge fund activity. The Anglo-American opposition to EU regulation involved supporting a hard Brexit and discretely funding the new populist Conservative party, whose leading members have acquired multiple links to UK and US hedge funds and international billionaires while restricting social payments, especially to those at the bottom of the economic pyramid. The future of the well-connected and wealthy Tory, at least, looks rosy.
The national popularity of the party will not last. Brexit was certainly an urgent cry for help. But it didn’t come initially from any downtrodden masses. It was not initiated from those deliberately left behind by austerity, by little Britain or white racist nationalists, although all these cohorts amplified the plaintive original call to be given their country back, give more powers to the police, ban demonstrations, reduce the immigration of dark-skinned people. The cry for help came from finance capitalists who found themselves down to their last billion and needed to roll loaded dice on a tipping table. The tiny constituency of entitled self-interest and greed found the perfect populist at the perfect time to turn their narrow interests into a broad election-winning coalition of the poor, the dependent, the misinformed and the dispossessed.
Before he is inevitably removed as leader, Johnson is now empowering those who are shorting and therefore destroying Britain, while the dispossessed remain dispossessed and unfulfilled, since they will not be getting anything back from being junked by international hedge funds and their right-wing accomplices. Britain’s enemies are rejoicing.