We live in acutely volatile political times. But some hedge funds are raking it in. So, what happens when the government is funded by disaster capitalists?
What are hedge funds?
The hedge fund market is as unpredictable as its investment strategies. As some shrink, others profit.
Over 590 hedge funds operate in New York alone, while over 400 operate in London. Some, like AQR Capital (managing around $224bn), are giants. Others, like KG Funds (managing around $328 million), are smaller.
Hedge funds are akin to mutual funds (mutuals), but riskier.
Mutuals buy financial instruments– like bonds–with pooled investments.
After the credit crunch, the US government blamed, in part, what it called the “shadow banking market” of mutuals for the growth of unstable money markets.
But hedge funds are even more volatile.
Hedge funds concentrate ownership and their investments are expensive enough to often exclude all but the mega-rich. This is politically significant because the more concentrated the wealth, the more their potential influence over policymaking.
Central banks’ handling of the crash (especially via “quantitative easing”) prompted financial management companies to innovate to continue making profits. So, hedge funds put their fingers in many pies. They invest in foreign exchanges (the largest liquid market, the Forex,) by classing them as assets.
A fluid dynamic exists between corporations and hedge funds. Before it became the world’s first trillion dollar company Apple, for example, set up a hedge fund, Braeburn Capital.
Conversely, hedge funds buy stocks and shares in corporations, as in D1 Capital’s investments in Amazon.
This is significant because service economy companies like Amazon, Apple, and Uber now constitute over 70 percent of GDP in the US and Britain.
Until recently, West Yorkshire Pension Fund was tied to Aurum and BlackRock.
In 2015, the London Pensions Fund Authority, Berkshire Pension Fund, and the Lancashire County Council established £750m in assets as part of a wider £16bn hedge.
Profiting from chaos
Hedge funds are by no means the first to profit from disaster.
In colonial India, the British kept the supply of staple foods short in times of famine to boost London speculators’ profits. More recently in Iraq, infamous cost-plus contracts were awarded to companies linked to key figures in the US government. But hedge funds are perfecting the art of disaster capitalism.
The UK’s construction management firm Carillion boasted sales worth £5.2 billion. It employed nearly 20,000 people domestically. For months the company’s stock fell in a clear sign of its imminent collapse.
The government intervened to keep services going, but not to rescue the company.
The US hedge fund BlackRock’s shares in the company were sold automatically as Carillion’s shares disappeared from indexes.
When Carillion’s share price dropped 70 percent in July 2017, short-sellers made an estimated $190 million, and a further $20 million when share prices dropped 48 percent in a day.
Other hedge funds, Bodenholm Capital and Coltrane Asset Management, made $4 million in the July drop.
Then Thomas Cook, the world’s oldest tour operator, collapsed.
The hedge funds that profited from shorting include Kite Lake, Melqart, Pictet, Silver Point, Sona, TT International, Whitebox Advisors, and XAIA. As with Carillion, the incumbent Conservative government (Tories) chose not to rescue the company.
Hedge funds and Tories
By 2007, Tory opposition coffers in the UK were filled in large part by hedge funds. By 2015, Tory government fund donations totalled £55 million, a significant amount of which came specifically from hedge funds.
They included Caxton Associates, Moore Europe, and the Red Kite Group. Tory and/or Brexit campaign donors included CMC Markets, CQS Assets, Odey Asset Management, and the Tosca Fund.
The American, Robert Mercer of the hedge fund Renaissance Technologies, financed the data company Cambridge Analytica, which worked with the Vote Leave campaign to promote Brexit. British PM Boris Johnson’s current advisor, Dominic Cummings, directed the Vote Leave campaign.
By funding Vote Leave, Wheeler indirectly worked with Cummings who is now pushing for a no-deal Brexit for his current boss, Boris Johnson.
In August, Cummings bragged to Tories about raising money from “billionaire hedge fund managers” for the impending general election campaign.
It is plausibly speculated that these and other investors stand to profit from currency fluctuations resulting from a no-deal Brexit.
In their Tory leadership challenge, hedge funds and similar management firms donated to both Jeremy Hunt and Boris Johnson, with Johnson raising the most money. Donors included individuals from the companies Melbury Capital, Montanaro Investment Managers, Perella Weinberg, RK Capital, SRM Global, and Christofferson, Robb & Co.,
Britain could stumble from crises to crises
The part-funding of a government by disaster capitalists raises serious questions.
Would Eurosceptic Tory MPs have been empowered to trigger the Brexit referendum at all without help from their hedge fund donors?
Had the investment climate been different, might the government have rescued Thomas Cook and Carillion?
Absent more regulation, Britain could stumble from crises to crises that make the poor more vulnerable and the rich hedge fund owners even richer.