Voice From The Back: Pollution and profits (2010)

The Voice From The Back Column from the January 2010 issue of the Socialist Standard

Pollution and profits

Every vote-seeking politician in the world waxes eloquent about the urgent need for a curb to be placed on global emissions. They fly hither and thither across the world addressing congresses about their deep concern for the planet’s future. Behind these vote catching antics however lies a more pressing problem – how to compete against international rivals in obtaining a larger share of the profits. At a recent meeting in Singapore those politician showed where their real priorities lie. “A key element of the international plan to address climate change is in jeopardy after several of the most powerful nations failed to confirm a previous commitment to halve gas emissions by 2050. The Asia-Pacific Economic Co-operation (Apec) forum, which includes the US, China, Japan and Russia deleted their commitment from the final version of the official communiqué issued after a two-day meeting in Singapore. …Most climate scientists believe that a 50 per cent reduction in global emissions by 2050 is the minimum needed to have a chance of avoiding catastrophic change.” (Times, 16 November) For some national governments to reduce industrial pollution could be economic suicide. Their costs would go up and they would not be able to compete with other nations that had not reduced their pollution. Inside capitalism in the battle between less pollution or more profits there is only one winner.

Capitalism in action

The case for a transformation of society from one of class division to one to one of social ownership was made very powerfully by two recent press reports. Here is how the present class division favours a tiny minority. Take the example of John Paulson, a hedge-fund manager in New York. “His firm made $20 billion between 2007 and early 2009 by betting against the housing market and big financial companies. Mr. Paulson’s personal cut would amount to nearly $4 billion, or more than $10 million a day.” (Wall Street Journal, 15 November) At the other end of the class division we read of this. “According to the FAO, the number of malnourished people in the world rose to over 1 billion this year, up from 915m in 2008. Economists at the World Bank reckon that the number living on less than $1.25 a day will rise by 89m between 2008 and 2010 and those on under $2 a day will rise by 120m..” (Economist, 19 November) Some people trying to survive on a couple of dollars a day while some useless parasite rips off millions, don’t you think we need a new society?

The next war? 

Capitalism is an explosively competitive society. We have had two world wars. One was supposed to be “the war to end all wars” the other was supposed to be a “war for democracy”. That was all nonsense of course. War inside capitalism is the logical outcome of competition for sources of raw materials, trade routes. markets and spheres of political dominance. Where is the next powder keg of competition? No one knows, but here is a possibility. “At the crossroads between east and west in the desert nation of Turkmenistan, a quiet battle is under way for natural gas, oil and influence, and the U.S. and Europe are losing out to China and the Muslim world. There’s a lot at stake: the Central Asian country has the world’s fourth-largest reserves of natural gas and substantial oil reserves, putting it in the same energy league as Saudi Arabia, Russia and Iraq. Plus, its position just north of Afghanistan could be hugely beneficial to NATO as it seeks more reliable supply routes to its troops on the ground there.” (TIME, 29 November) Socialists are as clueless as everyone else about where the next conflict will arise. What we are certain about is that thousands of men and women will die in conflicts in the future over their master’s quarrels. We are also certain that only world socialism can stop such a tragedy.

 

It must be obvious

“Hospital cleaners are worth more to society than bankers, a study suggests. The research, carried out by think tank the New Economics Foundation, says hospital cleaners create £10 of value for every £1 they are paid. It claims bankers are a drain on the country because of the damage they caused to the global economy. They reportedly destroy £7 of value for every £1 they earn. Meanwhile, senior advertising executives are said to “create stress”. The study says they are responsible for campaigns which create dissatisfaction and misery, and encourage over-consumption.” (BBC News, 14 December) Of course think tanks, because they are servants of capitalism see everything in terms of pound notes, but even they must see that all useful work and a lot of useless work is carried out by the working class. The owning class produce no wealth whatsoever. All they do is consume wealth.

Material World: Shareholder capitalism (2024)

The Material World column from the January 2024 issue of the Socialist Standard

In the last few decades the growth of institutional investors, in particular, in the guise of various kinds of funds – such as mutual funds, pension funds and, more recently, hedge funds – has been a powerful force in shaping the development of financialisation. Their large size has afforded them the leverage to impose a particular kind of financial logic on corporations with the focus very much on maximising ‘shareholder value’.

The CEOs – Chief Executive Officers – of big corporations have emerged as key agents in this trend, their commitment to the interests of shareholders having been firmly cemented and assured by means of such devices as stock options. This has had the effect of more closely aligning the interests of CEOs with those shareholders and is reflected in the astronomical rise in payouts to the former, an increasing proportion of which is, in effect, unearned income. Thus, whereas in the 1960s, America’s CEOs took home roughly 20 times what the average shop-floor worker made, today the figure is about 400 times or more.

Under increasing pressure to prioritise short-term results, managers are more inclined to make decisions that promote increased share value, such as mergers, acquisitions, and stock buybacks, rather than investment in physical production. Compliance is enforced by the threat of shareholders revolts, takeover bids by rivals or leveraged buy-outs by equity funds. The figures speak for themselves; more in the way of shareholder payouts means fewer funds available for investment, relatively speaking. According to Sam Pizzigati:

‘Between 1947 and 1999, non-financial U.S. companies shelled out an average 19.6 percent of their operating cashflow to shareholders, notes economist Andrew Smithers. The second half of that half-century saw stock options become an ever more dominant source of corporate CEO compensation. The 21st-century result? Between 2000 and 2017, the Smithers research finds, the average corporate cashflow to shareholders more than doubled to 40.7 percent’ (Sam Pizzigati, Aug 10, 2023 ‘Have Our Corporate Chieftains Become Expendable?’, Counterpunch).

Investment in physical production often involves certain immediate cost outlays and delayed benefits. That might require the board of directors to approve a request from the executive team to suspend dividend payouts (to the chagrin of shareholders) for the time being in order to finance this investment. Their reluctance to do this is a function of the shrinking time horizons (‘short-termism’) that businesses are subject to in an increasingly competitive world. All this has been aided and abetted by computerisation and the use of algorithms that have greatly speeded up decision making and made it imperative to adopt decisions that benefit a business in the short term with little thought of the long-term consequences.

Investing in the ‘real economy’ has the risk that in building up productive capacity one might exceed what the market is capable of absorbing – not least when your rivals might be wanting to expand output as well. Thus, it may sometimes be more prudent to simply buy up existing production capacity via mergers or acquisitions than increase that capacity yourself.

It is developments such as these that call into question the traditional image of the modern corporation as classically set out in Adolph Berle and Gardiner Means´s 1932 book, The Modern Corporation and Private Property. This seminal work helped to fix the image of the modern corporation in popular consciousness as an entity in which ownership is dispersed among numerous (and relatively inactive or powerless) and often small investors (thanks to the institutionalisation of laws such as those pertaining to limited liability that supposedly encouraged wider investment among the population by mitigating potential losses) with corporate control being decisively wielded in the hands of non-owning managerial elites.

Recent developments closely aligning the interests of CEOs with those of shareholders via the use of stock options and profit-based performance bonuses – major components in the compensation packages of modern-day corporate CEOs – have put the matter beyond doubt. Moreover, some of these compensation packages are on a scale that would certainly place their recipients in the ranks of the capital-owning class, even if only the lower rungs of that class, taking into account that a sizeable and growing chunk of that income is unquestionably ‘unearned’.

CEOs may ‘work’ but the mere fact that one works does not, of course, make one working class – any more than the possession of small amounts of capital makes one a capitalist. There is a certain point at which a change in quantity (in this instance, with respect to how much capital one possesses) translates into a change in quality or kind (from worker to capitalist).

In other words, and contrary to what the managerialist paradigm asserts, what we are seeing here is a convergence, not a divergence, of ownership and control. The top echelons of corporate management are, in effect, being steadily absorbed into the capitalist class. Alternatively, you could also see this as a case of members of that class taking on a more (pro)active managerial role in their companies for various reasons.

An extreme example of this would be someone like Elon Musk who, as well as having a personal fortune of $190 billion to his name, is said to have enjoyed a ‘compensation package’ involving performance-based stock options from the electric vehicle manufacturer Tesla, (of which Musk is the CEO), exceeding US$10bn in 2021. Clearly, this individual has no need to work whatsoever given the size of his personal fortune. It’s just that he chooses to do so for reasons we can only speculate on but are not, in themselves, important.

In short, then, capitalism has morphed from something like the kind of managerial capitalism that commentators like Berle and Means had in mind back in the early 20th century to today’s full-on ‘shareholder capitalism’.

Robin Cox

Tiny (URL) Tips (2009)

The Tiny Tips column from the December 2009 issue of the Socialist Standard 

In the wake of the horrific events of the day, his captain is cool. He walks up to Massey and asks; “Are you doing all right, Staff Sergeant?” Massey responds: “No, sir. I am not doing O.K. Today was a bad day. We killed a lot of innocent civilians.”

Fully aware of the civilian carnage, his captain asserts: “No, today was a good day.” Relatives wailing, cars destroyed, blood all over the ground, Marines celebrating, civilians dead, and “it was good day”!:

[Link.]

Even as the financial system collapsed last year, and millions of investors lost billions of dollars, one unlikely investor was racking up historic profits: John Paulson, a hedge-fund manager in New York. His firm made $20 billion between 2007 and early 2009 by betting against the housing market and big financial companies. Mr. Paulson’s personal cut would amount to nearly $4 billion, or more than $10 million a day. That was more than the 2007 earnings of J.K. Rowling, Oprah Winfrey and Tiger Woods combined:

[Link.]

Sixteen workers are killed a day in the United States because of reckless negligence on the part of their employers. Under existing laws, these employers get a slap on the wrist, or walk away scot-free. Meanwhile, workers who blow the whistle face threats and retaliation at the workplace:

[Dead Link.]

Its ruler re-named the days of the week after himself and his mother. Opera, ballet and the circus are banned. To get a driving licence, citizens must sit an exam on the dead leader’s autobiography. Welcome to Turkmenistan:

[Link.]

When veterans die — from lack of health insurance More than 1.5 million vets don’t have it, and 2,200 vets die every year because of it :

[Link.]

“. . . We suggest that it will be pretty much like this in socialist society. Although it will be global as opposed to tribal, people will still live in small localised communities..” But some people I imagine will choose a clean, green high-rise city lifestyle instead:

[Link.]

Why are so many Americans now toying with socialism, in a country that created the most successful free market economic system in history and spent half of the last century fighting the heresy of Marx’s socialism?

[Dead Link.]

“Americans are saying that with their planes they can see an egg 18 kilometers away, so why can’t they see the Taliban?” ABDULLAH WASAY, an Afghan pharmacist:

[Link.]

Cooking the Books: Divided Business Elite (2019)

The Cooking the Books column from the November 2019 issue of the Socialist Standard

Writing in the Times (3 October), its chief leader writer, Simon Nixon, insightfully explained the Brexit controversy as resulting from a ‘division among Britain’s business elite’, or, as we would put it, among the British capitalist class.

Noting that ‘one of the surprises of Brexit has been the strong support for leaving the European Union in some parts of the City and among a handful of Britain’s wealthiest entrepreneurs’ and that ‘this support is in contrast with the continued anxiety over Brexit among the bulk of Britain’s business leaders,’ he explained that ‘the hedge fund industry sits at the apex of the shadowy world of offshore finance that emerged in London in recent decades. This world is quite distinct from the traditional business of the City, which is serving as a domestic capital market for British and, since the creation of the single market, EU companies.’

It was not therefore surprising, he pointed out, that:

  ‘[P]rominent hedge fund tycoons have turned out to be enthusiastic Brexiteers. The hedge fund industry likes to operate in the shadows. It manages private pools of capital and believes that this entitles it to be exempt from the more onerous rules that govern the rest of financial services. What turned much of the industry so virulently against the EU was the introduction of the Alternative Investment Managers Directive in the aftermath of the global financial crisis, which imposed modest reporting requirements on the sector. Although the impact of these rules was close to nil, this shot across the bows was deeply resented. Whereas the EU’s status as a regulatory superpower has bought benefits to most sectors, creating opportunities to reap economies of scale across a single market, for the hedge fund industry it poses a threat.’

There you have it. A split in the British capitalist class. On the one side, the traditional and normally dominating section which benefits from frictionless access to the European Single Market and, on the other side, a section that wishes to avoid EU regulation of its lucrative financial activities.

The capitalist class is not a monolithic bloc with a single common interest (beyond – that is – seeing their property rights protected and the working class kept in its place). It is every section, indeed every company, for itself. Who gets their way depends on who has the ear of the government as their class’s executive committee. The normal way capitalists seek to influence government policy and legislation is through lobbying but, when this fails and the section concerned feels the issue is vital to their profit-making, then that section takes the matter to parliament and ultimately to the electorate, the vast majority of whom are members of the majority class of wage and salary workers.

With the referendum called by David Cameron in 2016, those that Nixon called ‘the hedge fund industry’ saw their chance. They poured millions into the Leave campaign (while the other capitalist section poured millions into Remain) and, unexpectedly, won. However, a subsequent general election returned a majority of Remain MPs. Hence the political impasse that has dragged on for over three years now, providing an initially amusing but now somewhat boring side-show.

It looks as if the working class is going to be called in to settle the matter. But why should we back one or other of the sides in this ‘division among Britain’s business elite’? Better to abstain or, even better, write ‘World Socialism’ across the ballot paper whether it’s a referendum or a general election.

Smoke and Mirrors: The Bend Some and Hedges Effect (2009)

From the February 2009 issue of the Socialist Standard

The fiasco surrounding the $50 billion hedge funds run by Bernard Madoff has been another illustration of the current instability at the heart of capitalism’s financial apparatus.

Hedge funds try to bend the normal financial rules of the market in whatever way possible, though it appears Madoff went too far in what could be the world’s biggest ever fraud. A massive investigation is under way into how Madoff set up and maintained a giant ‘Ponzi scheme’. These schemes take their name from Charles Ponzi, an Italian immigrant to Boston in the US who, during the early 1920s, set about spreading rumours of lucrative investment opportunities he was involved in. These supposedly guaranteed what the Wall St Journal exposed as impossibly high returns, when in reality most of the underlying investments did not exist and Ponzi merely took people’s money and used some of it to pay dividends and other returns to existing investors, while creaming the rest off for himself. This was able to continue as long as new investors were attracted to the schemes. When the flow of new investors stopped, the schemes imploded.

Although an investigation by the Securities and Exchange Commission in the US is currently taking place into the precise nature of Madoff’s actions, he has apparently confessed that the steady above-average returns that characterised his operation did not reflect the underlying reality and that, over time, his funds became an elaborate sham. There is now a mammoth scramble by wealthy investors, charities and financial institutions to try to recover whatever little may be left of their original investments, with these investors notably including funds managed (or held in custody) by major banks like UBS, HSBC and RBS. Indeed, Bank Medici reportedly had $3 billion invested with Madoff and because of this has now been taken over by the Austrian government (Financial Times, 3rd January).

Hedge funds
The Madoff affair is in many respects but the latest (and most spectacular) disaster to afflict the little-understood world hedge fund sector. Until last year, the most infamous previous case of a financial disaster involving a hedge fund was in 1998 when what had become the world’s biggest hedge fund at the time – Long-Term Capital Management – went bust. This had been headed by a team that included two Nobel Prize winners for economics, experts in the pricing and risk-assessment of complex financial instruments. But after years of stellar returns in the 1990s the fund collapsed and had to be bailed-out by a consortium of 50 investment banks put together by the then Chairman of the Federal Reserve, Alan Greenspan. The banks had already invested so much in LTCM (and loaned it so much money) that their own capital would have been seriously jeopardized by the losses incurred and Greenspan had to step in to help them in a way that was a precursor of recent actions during the 2008 financial crisis.

The collapse of LTCM demonstrated that those who viewed hedge funds as an esoteric but peripheral phenomenon were living in the past. Hedge funds had by this time become a hugely significant, if secretive, part of capitalism’s financial operations, with the ability to exert an influence on markets well beyond that of many governments. This had previously been demonstrated to those paying attention by George Soros and his Quantum Fund, which in 1992 had made $2 billion betting against sterling in the European Exchange Rate Mechanism, forcing the UK out of the ERM and metaphorically ‘breaking the Bank of England’ in the process, with government intervention unable to stop the slide of sterling against the deutschmark.

So, given the ascendancy of hedge funds in recent years and the recent media fascination with them, what do they really do and why are they deemed to have so much financial power?

Hedge fund strategies
While the public conception of hedge funds is that they are highly risky investment vehicles that aim at spectacular returns for their investors, this isn’t entirely true in every respect. Indeed, hedge funds gain their name from strategies aimed at ‘hedging your bets’, so that in theory the risk associated with one activity can be mitigated, at least in part, by others. Most hedge fund managers are not interested in relative performance measured against an accepted benchmark. In this sense, they do not aim to beat an index like the FTSE 100 or the S&P 500 in the US in the way that other investment managers running more conventional operations like unit trusts and investment trusts do (whereby, say, an annual return of minus 20 per cent would be considered a good relative performance if the market had fallen by more than 30 per cent as it did last year). Instead, hedge fund managers generally seek ‘absolute returns’, which are positive returns in any sort of market conditions.

Most, though certainly not all, hedge fund strategies are equity-based involving stock market investment, and hedge funds generally aim to try to secure returns noticeably better than the long-term annual average return from shares (which in most major western countries has tended to be in the 8-10 per cent range). This is another reason wealthy investors find them so attractive.

The strategies adopted by hedge funds to achieve this type of performance in all market conditions fall into various categories, the most common of which are the following:

Long/short equity, which involves buying shares in some companies in the hope they will go up (‘going long’), but shares in other companies in the hope they will fall (‘going short’), thereby hedging the bet. Going short usually involves borrowing shares and immediately selling them only to buy them back cheaply later when their price has fallen so that they can be returned to the original lender and the difference kept as profit. Sometimes this type of long/short strategy involves ‘pairs trading’, such as going long on BP but short on Shell in the belief that the former oil stock is undervalued compared to the latter.

Arbitrage, based on a variety of techniques and strategies used to exploit market pricing inefficiencies (for instance, a company like Shell is quoted on more than one stock exchange and there can be temporary discrepancies in the price quoted in Euros in Holland compared to the price quoted in sterling in London). Fixed income arbitrage funds try to exploit pricing inefficiencies in bond markets and this was the main strategy used by Long-Term Capital Management until its collapse. LTCM took the view, backed up by various mathematical models they had developed, that bond yields tend to converge over time. More often than not this is true, though not always – as they were to find out during the Russian debt and currency crisis of 1998 when traders took flight from Russia, sold risky investments and bought into the relatively safety of US Treasury Bills instead.But LTCM had bought low-priced and high-yielding Russian government securities, while at the same time selling short high-priced and low-yielding US Treasuries, in the expectation that their yields would converge over time. This was because they assumed that investors attracted by high-yielding Russian securities would buy them en masse, push their prices up and so reduce their yields, while selling the relatively unattractive US Treasuries, raising their yields. Charles Geisst pointed out in his excellent Wall Street: From Its Beginnings to the Fall of Enron that ‘the idea of converging yields evaporated overnight as the Russian obligations fell precipitously in price and the Treasuries gained as a result of the flight to quality. The fund was on the wrong end of both sides of the trade’ (p.380), a calamitous end for the Nobel Prize-winning economists.

Event-driven strategies, which can involve buying shares in the expectation that a company merger or takeover is likely, or which can involve buying into distressed assets (these are avoided by most investors so there is more likelihood of significant mis-pricing and the opportunity to buy assets at a knock-down price). Often hedge funds will buy the debt of a distressed company as a prelude to taking it over and/or liquidating it for a profit.

Macro-strategies, which are based on taking positions on what is likely to happen in the global economy. George Soros’s Quantum Fund has specialised in these macro-strategies, taking huge, credit-fuelled bets on the direction of currencies and commodities, for instance, and in doing so exerting more economic power than many governments can muster.

Quant strategies, which are based on complex mathematical models, and which can involve elements of the other strategies named above as well as short-term trading designed to profit from minute-by-minute and second-by-second price fluctuations.

What all these hedge fund strategies have in common is that they involve speculation to varying degrees as opposed to investment for the long-term, and typically involve significant amounts of leverage too (hedge funds often borrow in multiples of many times their own value as a way of maximizing their returns - for example, returns from arbitrage activities would often be minute if it wasn’t for the amount of leverage used). And unsurprisingly, these are two of the main reasons hedge funds are often considered to be risky, if not unstable, influences within the market economy.

Hedge fund structures
In truth, the risk hedge funds present to the operation of the market economy’s financial system isn’t solely because of what they do, though it is true enough that regulated investment vehicles like unit trusts and investment trusts are legally unable to adopt many of the strategies hedge funds use. The main issue with hedge funds, exposed once and for all by the Madoff scandal, is that they are largely unregulated entities for the secretive and super-rich, and as such are open to all sorts of abuses, attempting to bend the investment ‘rules’ at will under the guise of innovative practice.

Most hedge funds are restricted to investors – who on investing usually become limited partners – with at least $1,000,000 (excluding their main residence), i.e. they are for capitalists only. They are also limited in terms of the number of investors who are allowed to join the fund. This is to avoid the restrictions and regulations placed by governments on other investment vehicles designed for mass participation and has been a way for hedge funds to slip ‘under the radar’ of the regulators. Most hedge funds – registered offshore for tax reasons and run as private investment partnerships – are covered by little in the way of investor protection and are barred from advertising or being sold to retail investors. Aside from withdrawing their investments (there are often restrictions on this too) hedge fund investors have little practical control over the managers, usually even less so than other collective investment vehicles like investment trusts which have shareholders and an elected board of directors answerable to them and which have to issue transparent annual reports, regular trading updates and so on.

The basic hedge fund structure appears to have changed little since they first appeared in the early 1950s, having been pioneered principally by Alfred Winslow Jones in the US, though many others – such as Warren Buffett before he developed his huge publicly quoted Berkshire Hathaway investment vehicle – established comparable private funds at a similar time. Annual management fees are high, typically 1 or 2 per cent of capital under management, with another 20 per cent of annual returns over and above an agreed threshold, explaining why in recent years many high-flying fund managers working for the big investment banks have been so keen to leave and set up their own hedge funds.

The role of hedge funds
Hedge funds, like private equity, have emerged in the present economic crisis as some of the ‘bad guys’ of the financial world, almost as if a capitalism without them would somehow be sane and humanitarian. Small investors in retail banks in the UK that have had to be nationalised or merged railed last year against the hedge funds for shorting bank stocks, driving their prices ever lower. It was clear that this would have happened anyway though as was illustrated when the share price slides didn’t stop when the shorting of financial shares was prohibited by government order.

There is always a place in capitalism for scapegoats, especially those as rich as most hedge fund managers have been (and as unpleasant as some of them no doubt are). But this detracts from the real issue which is the instability and chaos that lies at the heart of the money/prices/profits system itself. Capitalism without hedge funds is just as brutish and nasty as capitalism with them – and the irony is that if you accept the rationale of the capitalist economy, hedge funds and other speculators, contrary to much popular opinion, play a useful role.

Capitalism’s financial markets are the lubrication for the entire capitalist economy. These markets depend on liquidity and frequent trading to accurately match buyers and sellers at any one moment in time. If trading is thin, this matching of trades becomes difficult if not impossible, whether in shares, bonds, commodities, or more complex financial instruments. If, for example, shareholders investing via the stock market all used a ‘buy and hold’ strategy and didn’t generally sell their shares for long periods after buying them, the equity markets would be stifled and trading difficult. This is why hedge funds and speculators more generally perform a useful role for the system – they are one of the main ways of ensuring sufficient liquidity for it to be able to function properly.

Their growth in size and influence, especially in the last 15-20 years, has been phenomenal, explained by their potential attractiveness to capitalist investors aiming for a steady but above average return, and their attractiveness to fund managers because of their flexibility and fee structures. The number of hedge funds in existence now runs into the thousands, with London’s Mayfair being nick-named ‘hedge fund alley’. According to the Financial Times (31st December), hedge fund assets under management have grown from less than $50 billion in 1990 to around $1,900 billion last year, making them a hugely significant economic force.

The current financial turmoil, however, has seen the biggest outflow of assets invested in hedge funds for decades, a sum estimated at $400-500 billion from January to November 2008. Lack of credit and high interest rates have meant that a great many hedge funds have had to de-leverage, reducing their debt as quickly as they can and selling their assets at the best prices they can get in falling markets. And as investors withdraw their money on the back of faltering returns, this has had the knock-on effect of hedge funds also having to sell their assets to meet redemptions, creating a vicious downward spiral for equity prices in particular, called ‘forced selling’. This was the cause of much (if not most) of the massive waves of selling on world stock markets last September and October, with quite unprecedented levels of market volatility over a sustained period.

Due to this de-leveraging and forced selling at low prices, several hedge funds have already gone bust and there will surely be more to come. In addition, because they were so highly leveraged, the unpredictable volatility in equity, bond and credit markets has ensured that some funds have just folded under the onslaught, including some of the macro and quant funds that should, in theory, have been able to capitalize on these situations.

As hedge funds operate in such a competitive market, those that don’t perform get shut down or merged with others (so much so that around 60 per cent of hedge funds are no longer around within five years of their inception). The financial crisis will almost certainly ensure that this figure increases further. Also, there are already indications that hedge funds will be the next target of the regulators and so it would seem that the great hedge fund bonanza is over, at least for now.

As for Mr Madoff, he will have done the cause of hedge funds no good either as their lack of transparency has been illustrated as starkly as it could possibly have been. Many capitalists will no doubt now be looking elsewhere to invest their wealth – so long as another Mr Madoff hasn’t made off with it first.

DAP