City & Business: Tide may be turning for investment high rollers

AT THE beginning of Liar's Poker, the William Lewis book on the glory years of Salomon Brothers, John Gutfreund strolls over to the trading desk and whispers to one of the assembled: 'One hand, one million dollars, no tears.' The chairman of one of Wall Street's largest investment banks was challenging the trader to bet a million dollars on a childish game, which involves guessing the serial number on a dollar bill. The trader, one of Salomon's best, reputedly replied; 'No John. I'd rather play for real money. Ten million dollars no tears.' Gutfreund said 'You're crazy', and declined.

The man who so cleverly outbluffed him was John Meriwether. Mr Meriwether eventually became embroiled, along with Mr Gutfreund, in the bond- rigging scandal that nearly sank Salomon, and the two were forced out. For a few years, Mr Meriwether vanished from the scene, but now he's making a comeback. He's doing so - surprise, surprise - as one of Wall Street's biggest hedge fund players. Currently he's trying to raise several billion dollars from investors to trade in complex financial instruments, using all the latest fancy computer-driven techniques. When Mr Meriwether places a bet in the world's capital markets, he gambles big - very, very big. With the promise of 30 per cent returns per annum, he already commands a considerable following.

It sounds impressive, but among hedge fund players he is by no means an exception. At the last count, there were about 800 of them with capital of around dollars 50bn ( pounds 33bn). The top five funds account for half of this. Once you include their ability to gear up with debt, their total firepower in capital markets could be as high as dollars 500bn. These are frightening large figures for largely unregulated andunsupervised institutions; it's little wonder that central bankers are increasingly concerned about their proliferation.

This weekend, banking supervisors have hedge funds high on the agenda as they assemble in Basle for one of their regular meetings. Central banks come at the problem from differing perspectives. The Continental supervisors tend to see hedge-fund players as wicked destabilising speculators, wreckers of fixed exchange rate mechanisms and destroyers of bond markets.

The Bank of England and the Federal Reserve Board on the other hand are much more tuned into and comfortable with market volatility. Their chief concern is about the risk hedge funds present to the banking system. Do bankers fully understand what they are doing when they lend money to hedge fund players? What collateral do they ask for? Do they even know who and what they are lending to, other than a bunch of whizz-kid traders? What unites all central bankers, however, is that they understand hardly anything about this relatively recent phenomenon. The little they do know is largely anecdotal. Hedge funds were said to have played a big role in driving the pound out of the ERM. They are also rumoured to have been a big factor in the bond market sell off in recent weeks. At the Bank of France and the Bundesbank, this kind of market power is seen as a bad thing per se, but somehow I doubt the hedge funds are quite as influential as claimed. Bond markets were riding for a fall in any case, and so was the ERM when it collapsed; it had become untenable.

Hardliners among the supervisors will nevertheless press for draconian action, perhaps the imposition of international restrictions that would make lending to the hedge funds much more difficult. It may well be that the high tide of the hedge fund era has in any case already been reached. All of them are finding it much more difficult to make money this year, and some of them are beginning to show quite substantial negative returns.

As our feature on George Soros shows, hedge fund investors get little, if any, protection and they have to take an awful lot on trust; there seems to be considerable scope for abuse. Mr Soros and his senior managers appear to run their vast investment empire in the manner of a small-town family business. The borders between what belongs to Mr Soros and his inner sanctum of managers on the one hand and investors on the other are blurred almost to the point of indistinction. Rules are chopped and changed in a seemingly arbitrary fashion, and Mr Soros appears to have the ability to 'reallocate' gains to himself in almost any way he chooses. I guess it's a tribute to his reputation that investors have so far been prepared to put up with what in any regulated fund would be totally unacceptable terms and practices.

You have to wonder for how much longer though. When everyone is making hay, nobody much cares about the division of spoils; investors will accept almost any terms to get in on the action. But when things change and the money doesn't roll quite as it used to . . .

people'It can last and it's terrifying'
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
footballStriker has moved on loan for the remainder of the season
footballFeaturing Bart Simpson
New Articles
Olivia Colman topped the list of the 30 most influential females in broadcasting
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
The five geckos were launched into space to find out about the effects of weightlessness on the creatures’ sex lives
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
ebooksAn unforgettable anthology of contemporary reportage
news Video - hailed as 'most original' since Benedict Cumberbatch's
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
Arts and Entertainment
Word master: Self holds up a copy of his novel ‘Umbrella’
booksUnlike 'talented mediocrity' George Orwell, you must approach this writer dictionary in hand
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

£40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

Technical Software Consultant (Excel, VBA, SQL, JAVA, Oracle)

£40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...

SQL DBA/Developer

£500 per day: Harrington Starr: SQL DBA/Developer SQL, C#, VBA, Data Warehousi...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering