Polanyi in Times of Populism: Vision and Contradiction in the History of Economic Ideas by Christopher Holmes

Author:Christopher Holmes [Holmes, Christopher]
Language: eng
Format: epub
Tags: Political Science, General
ISBN: 9781315396965
Google: Ux9WDwAAQBAJ
Goodreads: 39819245
Publisher: Routledge
Published: 2018-04-17T12:12:44+00:00

Hedge funds and financial innovation

Hedge funds were in many ways the archetype for the new era of private sector finance from the 1980s onwards. Using nothing more than intelligence, guile and a solid internet connection, these ‘new market wizards’ (Schwager 2001), could wring stratospheric sums of cash out of financial markets for personal gain, tearing up the cosy and predictable relationships between banks and stockbrokers that had existed before. But the hedge fund model can be traced all the way back to Alfred Winslow Jones, who is generally recognised to have set up the first such fund in 1949 (Ineichen 2003; Lindgren 2007). Jones sought to eliminate market-wide risk from his portfolio by selling short shares that were participating in the same market environment as his long portfolio as well as using the same technique to exploit price differences for similar goods in different marketplaces. Having faith in his abilities, he also borrowed significant sums in order to amplify his bets. These characteristics – short selling, arbitrage and leverage – are the distinctive markings of the hedge fund investment model, all geared towards outsmarting the lumbering beta-led investor population in the search for alpha returns.

Over the 1980s and 1990s, hedge funds came to be seen as the very expression of the power of the private financial industry over state management of the economy. They were, for example, instrumental in many of the key battles between market and state actors over the power to determine the value of money discussed above. George Soros received much critical opprobrium for using his Quantum hedge fund to bet against the value of the pound during the ERM crisis. Such was Soros’s fund’s reputation that, after having made the bet, many other hedge fund managers expressed their greater belief in his power to determine the value of the pound than that of the UK government, turning the possibility of being forced out of the ERM into a certainty. Hedge funds appeared to have made massive profits by using a similar strategy against the Thai baht in 1997, propelling the Asian financial crisis and deepening their infamy, although provoking little in the way of a regulatory response (Harmes 2002: 157).

In the wake of the sub-prime mortgage crisis, the sector again drew flak for much the same reasons: profiting at the expense of general decline. Short-selling strategies had proven to be useful in exploiting the dynamics of the crisis (Mackintosh 2008; Credit Suisse/Tremont 2008) but this time, regulators across the globe were surprisingly quick to pounce. The US Securities and Exchange Commission (SEC) banned short sales in over 900 financial companies, the Financial Services Authority (FSA) in the UK enacted a similar ban on its financial stocks and respective regulatory organisations from all major trading bases around the world went on to follow suit (Financial Times 2008: 32). Nevertheless, the focus on short selling in the SEC and FSA rulings only really functioned to defend the values of stocks at the height of the crisis, and certainly did not present any serious challenge to the viability of the hedge fund sector.

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