City Eye: And so to sleep ... in spring we'll be rudely awakened

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The Independent Online

Welcome to 2008, a new year for the markets but a continuation of what one eminent hedge fund manager calls the "crisis of complacency".

The sage with the felicitous turn of phrase is one of the smartest American hedge fund managers around Edward Vasser, chief investment officer at Wolf Asset Management International. The complacency is all to do with the rather hopeless swooping and soaring that's been going on with interest rates and liquidity ever since the summer of last year.

It has become fairly clear now that the Bank of England did too much too late with Northern Rock, the basket case of the credit crunch crisis. A little bit of liquidity in the inter-bank market should have been made available a lot earlier. But there was the complacent notion within the loose confederation that constitutes the UK's financial establishment the Financial Services Authority, the Bank of England and our lords and masters in Whitehall that the markets needed to be taught a lesson. So funds weren't made available at first, and we ended up with a stock market that went into spasm and a horrible hiatus in deal flow.

That was the swoop a product of complacency. Then came the super-abundance the extravagant loan made by the Bank of England to Northern Rock. There was also a dearth the inadequate shaving of interest rates in the UK. We're probably going to find ourselves with base rates down to 4 per cent by the summer, and the credit tap will be switched back on again. The joystick jammed back, we'll pull out of the dive and soar upwards.

But I suggest that this too is a product of complacency. There will be a nice little bull run call it a heffer trot through till March or perhaps the end of April. The low rates will please everyone in the short term, and the delinquent loans will be massaged, repackaged and hidden from view.

All honest investment professionals admit to making some decisions on what they feel in their gut. Last summer, I took the view that the real nastiness would come out at the end of the first quarter of this year, and I think I may have struck lucky there. We'll be complacent until it starts getting warm, and then the cockroaches will crawl out of cracks temporarily papered over by the violent downward surge in interest rates that we are going to see.

All of which is good news for hedge fund managers. This industry is unregulated and unquantified. Katherine Burton, a former colleague of mine at The International Herald Tribune, reckons in her excellent new book, Hedgehunters, that in 2007 there were around 2,400 single-manager hedge firms worldwide, controlling $1.7 trillion in assets. Overall, industry estimates put the total number of investment funds at 10,000, with some 3,000 hedge funds in operation.

The term "hedge fund" has become almost meaningless in modern times. In the Eighties and early Nineties, it meant counter-intuitive investing ("shorting" aggressively and provoking lows would be just one example). Nowadays, it often means people who have formed a limited liability partnership and can't be bothered to be accountable. American regulator the Securities and Exchange Commission tried to impose basic norms of transparency on US hedge funds client details, funds under management, etc but was taken to court and lost.

But there are some old-fashioned, super-smart ones out there (Vasser is one). If the hedge verity of volatility being the investor's friend holds good, the funds will have a great 2008. Watch out this spring, I say.