Jeremy Warner's Outlook: Hedge funds and market abuse? Surely not

Sky is packed off to the Commission; OECD: becoming a touch out of date
Click to follow
The Independent Online

Active fund management used to be a comparatively simple affair: if you didn't like the management, you voted with your feet and sold the shares. With the advance of hedge funds, the activists today are a more belligerent and aggressive bunch.

Underperforming managements are deliberately targeted, and if the hedge funds cannot get their way in behind-the-scenes meetings, they write hostile letters which they leak to the press demanding action, management change, an egm or break-up.

When it is someone with a reputation who is doing the agitating, such as Christopher Hohn of the Children's Investment Fund (TCI), the effect on the share price is generally electrifying. So much so that you sometimes wonder why they hang around to see through the action demanded. Revaluation of the shares becomes a self-fulfilling prophecy.

These strategies have raised eyebrows, with it sometimes suggested by target managements that it is a form of insider dealing in itself to buy shares in a company where you know demands for change are about to be tabled. As far as the principal investor is concerned, this is plainly not the case. If it was, no company could accumulate shares in an entity it knew it might bid for. There is a specific exemption to cover principals. It also applies to hedge funds agitating for change. Yet it self evidently would be a form of abuse if your hedge fund pal down the road also piled into the stock knowing what was about to occur.

Somewhat worrying is that the Financial Services Authority yesterday found it necessary to clarify this point in its regular markets newsletter. This was apparently in response to requests for guidance following the shenanigans which has surrounded dealings in ABN Amro shares. A large number of hedge funds have actively traded this break-up and bid situation. Who knew what and when are still questions being investigated by the FSA.

The request for clarification makes you wonder what on earth everyone has been up to. Hedge funds and market abuse? That's a contradiction in terms, isn't it? Regrettably, insider dealing hasn't been as rife as it is now since the days of Ivan Boesky in the mid-1980s.

Sky is packed off to the Commission

The regulatory quagmire which surrounds much of Britain's media industry was again in evidence yesterday when Alistair Darling, fresh from the Government's failure to solve Britain's looming energy crisis, announced that he would be referring BSkyB's 17.9 per cent stake in ITV to the Competition Commission. Fortunately for the Secretary of State for Trade and Industry, he had no option in the matter. The law obliges him to accept the Office of Fair Trading's instructions on reference decisions, which is just as well, for it wouldn't do to upset Rupert Murdoch just as you are about to step into the Chancellor's shoes.

Theoretically, I guess he could have rejected separate advice from Ofcom that the stake be referred on the different grounds of threat to plurality of media ownership, but it would have set a bad precedent to slap down the communications watchdog in this way. Given that BSkyB was being packed off to the CC in any case, Mr Murdoch shouldn't harbour too much of a grudge.

It was, of course, for the purpose of removing these decisions from the suspicion of political interference that the Government established an independent competition policy. The effect is also to absolve ministers from responsibility for decision making. For the Competition Commission, the case is none the less likely to be a nightmare.

The shareholding is plainly of a size which theoretically would allow Sky to have management influence, yet in practice it would be quite difficult to use the stake for that purpose. Michael Grade, the ITV chairman, has already made it plain that it won't stop him bidding against Sky for rights or other business assets, or from going head to head with BSkyB in the market for advertisers and viewers. Sky has also pledged that the investment will be treated as passive.

The test would come if ITV tried to do something Sky disapproved of that required shareholder approval. The stake is potentially large enough to frustrate ITV. Indeed, it has already in effect been used for that purpose. By acquiring the stake, Sky scuppered hopes of a merger with NTL, since rebranded Virgin Media.

Not that this was the purpose of the stakebuilding. Absolutely not. Who would ever suggest such a thing? James Murdoch, the chief executive, insists that he bought the stake because he thought it would be a good investment. So far it has not lived up to those expectations.

In any case, it is going to be difficult enough for the Commission to decide whether the stakebuilding disobeys basic competition law. The whole process sinks further into the mire when it comes to considering other public interest issues such as plurality of news coverage. Sky News competes directly with ITN. Why not just close ITN down and have Sky instead? The CC may feel obliged to hem this stake in with a myriad of different terms and conditions.

Meanwhile, Ofcom is conducting a separate investigation into the the pay-TV market, including the dispute between Sky and Virgin Media over carriage charges. Still, if you thought all this regulatory activity would have succeeded in tying the Murdochs up in knots, you'd be wrong.

Out in New York, Murdoch senior is campaigning hard to buy the Wall Street Journal, while over here, his son James is knocking the spots off Virgin Media in the only war that really matters - the competition for subscribers. The bottom line is that both the dispute over carriage charges and the ITV stake were designed to keep Virgin Media in its box. So far, the strategy seems to be succeeding.

OECD: becoming a touch out of date

Of all the international organisations, the Organisation for Economic Co-operation and Development is perhaps the most curious. Set up in the immediate aftermath of the second world war to promote best practice economic policy and governance among member states, it is today known chiefly for its worthy economic reports and bewildering database on everything from healthcare spending to productivity and nutrient use in agriculture. As a way of providing peer group comparisons, its work is invaluable.

It has also been responsible for a number of international conventions which help support free market trade, including the anti-bribery convention which has been much in the news because of BAE Systems' alleged use of corruption in winning contracts in the Middle East.

Yet for what it is and the public recognition it commands (virtually none outside a small elite of economists, politicians and opinion formers), it remains an extraordinarily grandiose body of questionable modern day relevance.

The two most talked about economies in the world - China and India - are not even members, while even the OECD's bi-annual economic outlooks, the latest of which was published yesterday, have become a mixture of the consensual, self evident and out of date. Nobody takes any notice of its strictures - the markets the OECD is there to promote are much better policemen of these matters than the OECD - and to the extent it has any authority at all, it lacks teeth.

I don't want to be unkind, but really. How useful, for instance, was the OECD's observation yesterday that Britain would need to keep interest rates on hold to keep prices in check? Only the day before, the Bank of England had virtually admitted it would have to raise them again.

Housed in a Paris chateau once frequented by Marie Antoinette, the OECD is so far removed from the lives of ordinary people that you have to wonder about its grip on reality. Staff have the status of diplomats and most members maintain full-time ambassadors, some of them complete with sumptuous residences. Like all international organisations, the OECD must modernise to survive. As it stands, it looks too much like a relic of a bygone age.

j.warner@independent.co.uk

Comments