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 . . .

News
people
Sport
FootballGerman sparks three goals in four minutes at favourite No 10 role
News
Rumer was diagnosed with bipolarity, attention deficit hyperactivity disorder and post-traumatic stress disorder: 'I was convinced it was a misdiagnosis'
peopleHer debut album caused her post-traumatic stress - how will she cope as she releases her third record?
Sport
A long jumper competes in the 80-to-84-year-old age division at the 2007 World Masters Championships
athletics
PROMOTED VIDEO
Sport
Radamel Falcao was forced to withdraw from the World Cup after undergoing surgery
premier leagueExclusive: Reds have agreement with Monaco
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave long-running series
Life and Style
Walking tall: unlike some, Donatella Versace showed a strong and vibrant collection
fashionAlexander Fury on the staid Italian clothing industry
Arts and Entertainment
Gregory Porter learnt about his father’s voice at his funeral
music
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Life and Style
Children at the Leytonstone branch of the Homeless Children's Aid and Adoption Society tuck into their harvest festival gifts, in October 1936
food + drinkThe harvest festival is back, but forget cans of tuna and packets of instant mash
Sport
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
New Articles
i100
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam