As a British taxpayer, it seems that my portfolio of UK bank stocks gets bigger by the day. I work for a UK financial institution and now the government is helping me hedge my risks to the sector by pledging my taxes to other firms in the same business. "When in doubt - double up!" Northern Rock, Bradford & Bingley, HBOS, RBS, what a great group of assets. If you start seeing ads appear on this blog, it will be a signal that maybe this whole "hedge" thingy hasn't quite worked out.
It’s Thanksgiving in Canada today. Aside from the normal celebrations, they should also be giving thanks that their banks don’t seem to need the same intervention from the Canadian government as many other banks around the world need from their governments (and taxpayers). Happy Thanksgiving!
It should have been easy to predict, but yet it was still a surprise when I read it. FT.com reports that “Hedge funds driving stocks collapse”. Fresh from months of being blamed for driving down markets through aggressive short selling, hedge funds have now been targeted as the culprits behind recent market losses due to redemptions. Leverage is coming down across three different groups - at the investment bank, Funds of Hedge Fund and hedge fund levels. Clearly, as I have mentioned in previous blogs, investors cashing in their hedge fund investments has lead to forced selling that has contributed to the recent falls. However, this has also had a short covering buying impact that will have offset some of the negative flow. I also acknowledge that the nature of hedge funds is such that they have more freedom to act quickly and that their actions can direct short term momentum dramatically.
But let me get this straight: the short selling caused the crash – “Lets stop short selling” … Wait, that didn’t work … Now the clear answer is … “It’s the hedge funds selling all their long positions” … The next headline will no doubt be “The hedge funds are sitting on the sidelines and not investing their cash, thus undermining the confidence in any recovery”. Sheesh!
It’s no wonder many people are talking about dumping the “hedge fund” moniker.
Back to securities lending for the moment. I reported over the weekend about the State Street letter to clients. On Friday AIG also issued this press release. In it, they announce additional borrowing from the New York Fed that will allow AIG to replenish liquidity to their securities lending program.
The challenge across the money market industry as a whole, and the securities lending reinvestment community as a subset of this, is to be able to have the liquidity in your funds until the maturity of the instruments. The overwhelming majority of the paper being held in these funds represent purchases that will meet the initial investment criteria.
The problem is that the stock market has become a bear where investors are running away screaming rather than choosing to sell investments in a rational way. It is a series of forced liquidations, irrational fears and undifferentiated dumping of assets. As an old friend from Toronto noted in a comment to me last Friday: "A flight to quality, with no destinations".
Maybe the announcements this weekend and subsequent actions will carry on the sentiment that I mentioned at the end of last week where some people are now looking for bargains. The markets are looking better this morning, and maybe the US holiday will give people some pause for thought. Enjoy Columbus Day!
A couple of pieces of humour …
