5 Hedge Funds
Decarbonization needs rules to penalise shadow banks’ carbon lending
In the midst of a global crisis, the hedge fund has prospered. The top fifteen hedge-fund managers earned an estimated $23.2 billion last year, according to Bloomberg. Chase Coleman, the forty-five-year-old founder of Tiger Global Management, led the way, hauling in more than three billion for himself. The Financial Times took a more democratic view of the phenomenon, noting that the top twenty “best-performing hedge fund managers of all time” had provided more than sixty-three billion dollars for their investors during the coronavirus-driven market turmoil, “making it the industry’s best year of gains in a decade.”
Given the supremacy of hedge funds, it was both satisfying and terrifying to observe the recent boom and bust in the value of GameStop, a run driven by small-time speculators. Several hedge funds lost extraordinary amounts of cash—as in billions and billions of dollars—on financial derivatives.
Those who work at hedge funds are diligent about keeping who they are and what they do obscured behind a wall. Secrecy is intrinsic to the job description—for a hedge is a wall.
Kaufman in New Yorker: History of Hedge
5.1 Hedge Central Banks
Braun (twitter)
Let’s create a Chinese wall between sovereign bond issuers and the central bank. Wait who’s up there taking bonds from the issuers and throwing them at the central bank at a profit whose social value is 0? Oh no they’re hedge funds.
WSJ 210510
Hedge Funds Face Backlash From Europe in Bond Market Spain, France and Italy have moved to curb orders from hedge funds to avoid demand for new bonds from appearing inflated.
European governments are acting to limit hedge funds’ participation in the market for new sovereign-bond issuance, following a surge in demand from the firms.
The pushback was prompted by unusually large orders placed by hedge funds for new bonds, which can then potentially be sold—sometimes within hours—to the European Central Bank for a profit, bankers, investors and a government official said. Order books, which track demand for new bonds and help determine the prices, have ballooned since hedge funds began to pile into this trade.
The debt-management offices of Spain and Italy have placed caps ranging from €500 million to €1 billion, equivalent to $608 million to $1.2 billion, on orders from hedge funds for bonds directly issued by countries in the primary market, according to bankers who worked on the deals. France has also limited order sizes, an official said.
Millennium Management, Brevan Howard, DoubleLine, Tenaron Capital Management and BlueBay Asset Management are among the hedge funds that have been active in the primary market for sovereign bonds in recent months, according to bankers. Some hedge funds have put in orders for as much as €3 billion of bonds in a single offering, which is far more than they can realistically buy, the bankers said.
Large investment firms, pension funds, insurers and banks’ treasury departments are usually the biggest buyers of government bonds in the primary market. Countries issuing bonds typically seek to avoid investors with a short-term horizon. That is because hot money flowing quickly in and out of their debt can make prices volatile and potentially drive away other buyers, which could increase their borrowing costs.
Hedge funds became bigger players in Europe’s sovereign-bond market after the ECB last year put forward a program to buy as much as €1.85 trillion of debt to backstop credit markets and have stepped up their activity in 2021. The central bank only purchases government bonds in the secondary market, creating an opportunity for investors to buy bonds directly from the governments and sell them to the ECB.
In October, the first issuance of European common debt attracted an unprecedented €233 billion in orders, according to the European Commission. That was the most ever in records dating back to 2003. Around 80% of the bids were from hedge funds, according to a banker who worked on the deal. The commission, which is the executive arm of the European Union, ultimately raised €17 billion.
Hedge funds have sought to turn profits from central-bank stimulus programs previously. The Federal Reserve’s Troubled Asset Relief Program during the 2008-09 financial crisis drove distressed-debt investors to snap up assets such as mortgage-backed securities and U.S. bank debt cheaply and sell them to the Fed. The corporate-bond market in Europe is another area where this trade happens, as the ECB also buys investment-grade corporate debt to support the market.