Simon Evans: Hedge funds don't deserve to be the crisis scapegoats

Traditional fund managers are more blameworthy
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The Independent Online

There's a game that's back in town: it's called knocking hedge funds. The Government has had it's turn, the regulator has been blasted and private equity, which has largely been shown up as nothing more than a modern day smoke and mirrors trick, has been battered.

And now we are returning to that old anti-hero, the hedgies. The overpaid, manipulative, secretive bunch that work out of shady offices in the back streets of London's City and West End plotting the demise of companies and markets.

While I'm sure that hedge funds sit somewhere in the hierarchy of blame for the financial crisis the world finds itself in, I can't help feeling that their influence has been dramatically overplayed and the blame being apportioned is too great.

The size of the biggest hedge fund players in the world is tiny compared to the banks and the traditional asset management world of unit trusts and long only funds.

On the issue of short selling, a bugbear of hedge fund critics, I have no problem with a fund shorting a stock that it thinks is overvalued. Market abuse, where proven, should be tackled and the book should be thrown at the perpetrators. But there is a large degree of hypocrisy in this debate. When your traditional fund manager took punts on stock prices going up, often on nothing more than speculation and rumour, did you moan? Of course not.

While hedge funds take a lot of the flak, anger would be better directed at those fund managers and the pension funds that have shown themselves to be largely impotent throughout this crisis. Remember it was these institutions that cosied up to the likes of Sir Fred and waved through their often giant pay and bonus packages.

Where were the hedge funds then? I hear you ask. Hedge funds typically trade using cheaper derivative products such as CFDs, which aren't loaded with stamp duty like traditional stock transactions but don't come with voting rights. If Darling and Co had got rid of this absurd anomaly then there would have been plenty more instances of hedge funds voting against giant pay packets.

So can I suggest an alternative avenue for your frustrations? Send a letter to your pension fund and ask for their voting records on executive pay during the last five years. Hold them to account as to why they agreed to these often-gargantuan bonuses without a whimper.

Now is the time for the traditional fund managers and pension funds to find their collective cojones, but sadly they seem to be coming up short once again.

The City's biggest investors show their teeth on far too few occasions. It is a constant source of amazement to me how toothless bigger players such as Legal & General have been when it comes to demanding board shake ups, bringing in relevant and competent non-executives and the like. The big institutions tell us they work quietly in the background getting things done in a diplomatic manner rather than in the public eye. Clearly that form of discretion hasn't worked.

It's time to forget the pantomime villains, the hedge funds, and concentrate on those more familiar to us who have a lot more to answer for.

Debunking the myth that boardrooms benefit from vast age and experience

If you get a chance this week, take a look a Governance in Crisis, a new report assessing the failings at six American investment banks during the credit crisis.

Written by Nestor Advisors, which is run by the OECD's former head of corporate affairs, it compares the good, the bad and the hideously ugly corporate governance practices at Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, JP Morgan and Goldman Sachs.

It draws out some interesting points such as why having ageing board members poses significant risk to a company, which often outweigh the benefits of experience that we tend to laud. In Britain, like the US, we hold great store in having an experienced board when what we actually need is a relevant board.

Given our experiences with Royal Bank of Scotland and Bradford & Bingley, it all sounds horribly familiar. Old directors might be less alert to business challenges and sit further away from the financial frontlines. Interestingly, the now departed Lehman and Bear Stearns had no cap on the age of their directors. The survivors did. Those banks in the survey that are still with us, set age limits of 70-72 for board membership while the others didn't. The average age of a board member at Lehman and Bear Stearns was 66.5 compared to 61 elsewhere.

Between them, Lehman and Bear Stearns had nine non-executives above the age of 72. Surely it's time to hit the golf course rather than the boardroom when you reach such a lofty age.

The report also warns of the dangers of having a man or woman at the top of a company for too long. By becoming part of the furniture – dubbed board lifers – Lehman's Dick Fuld and Bear's Jimmy Cayne became all powerful and perhaps wielded undesirable influence over non-executives who could have slammed the brakes on the expansion plans.

Clipped wings: Canary Wharf's owner forced to restructure

It doesn't look good for Songbird Estates, the owner of Canary Wharf in London's Docklands. It has hired Rothschild to try to restructure the firm before a covenant test in May and a more onerous deadline next year, when it has to refinance an £800m loan.

Songbird said last week that it had been forced to write down the value of its assets by £1.7bn.

News recently surfaced that Bank of America is looking to ease itself out of the Wharf and back to the City where it will share space with Merrill Lynch.

The Canary Wharf complex was developed by Olympia & York, which declared bankruptcy in 1992 during a previous property market collapse. Sadly, this property slump may take another scalp soon.