It was a clash of cultures, a face-off between secretive capitalists and hard-nosed politicians yesterday, as hedge funds faced the Treasury Select Committee on the banking crisis.
Four prominent hedge fund managers faced hostile accusations from the cross-party selection of MPs as they fought to retain the light regulation that has allowed the industry to thrive and generate trillions of pounds of profit in recent years under much less scrutiny than banks.
But they faced probing questions in the wake of the financial meltdown and the Bernie Madoff scandal, where hedge funds, pensions and banks lost $50bn (£35bn) in an alleged fraud in the US. And as the MPs pushed the hedge funds on the industry's secrecy and its power to disrupt the financial system, those facing them fought to limit how much they need to disclose to the public and tried to keep regulators at bay.
"Blaming the hedge funds for the banking crisis is like blaming the passengers in a bus crash," Paul Marshall, co-founder of the Marshall Wace hedge fund, one of the funds that held short-selling positions in HBOS last summer, argued to the committee.
Hedge funds are among a number of sectors being hauled in front of the committee as part of a continuing hearing. Those in what at times seemed like a court dock were Andrew Baker, head of hedge fund trade organisation the Alternative Investment Managers Association (AIMA); Mr Marshall; Douglas Shaw, a managing director at the hedge fund manager Blackrock; and Stephen Zimmerman, chairman of NewSmith Capital Partners.
Also there was Chris Hohn, one of the biggest stars of the UK-based hedge fund industry and the founder of The Children's Investment Fund, whose brand of activist investing – buying shares in a company in order to gain a seat at the table with management and push through changes – led to Deutsche Börse calling off its 2004 bid for the London Stock Exchange and helped force the Dutch bank ABN Amro into the arms of Royal Bank of Scotland last year.
Gordon Brown said earlier this month that the ABN deal was in part responsible for causing the need for the RBS bailout. Also among the MPs was the Newcastle Central Labour MP Jim Cousins, who at one point told Mr Hohn: "ABN Amro has ended up with the British taxpayer, pray for us!"
Short-selling was a key topic of discussion, with the funds – who all admitted shorting British banks in the last year – arguing this had no impact on the financial crisis. They said bank shares continued to fall after the FSA banned short-selling on 18 September. The FSA removed the ban on 16 January.
The hearing took place as it emerged that Paulson, a US hedge fund, may have made a profit of more than £270m betting on a fall in RBS. Other funds, including Lansdowne, also profited from short positions in recent weeks.
The issue of disclosure also came up too. The FSA has retained a requirement for hedge funds to disclose short positions of note in those stocks and any change to those positions. The representatives of the funds argued that such disclosure discourages them from making such trades because they do not want to be singled out in the public eye. Marshall and AIMA pushed for the current regime to be replaced by so-called aggregate disclosure, whereby the total number of short positions on a given stock would be revealed. In a final swipe at the industry's secrecy, the panel suggested those present send them details on the salary structures at their funds. They accepted.
Guidelines governing hedge fund administration may be toughened up in the wake of the Madoff scandal, the chairman of the Hedge Fund Standards Board, Antonio Borges, said, sitting on a separate hearing. However, the relevance of the HFSB was questioned repeatedly by the MPs, who argued that the voluntary association has only 34 members – out of more than 400 UK hedge fund managers. This was one of the reasons for demands for tougher regulation for the industry.
The committee's chairman, John McFall, said he concluded that hedge funds currently face less disclosure requirements than banks, that the larger players in the industry may be destabilising banks, that naked short-selling should be banned, that industry bodies are weak and that the industry suffers from extremely bad public relations.
Fund managers under fire
Mr Marshall, a prominent Liberal Democrat supporter who is understood to have given the party more than £160,000 in recent years, co-founded and runs the hedge fund Marshall Wace with Ian Wace. The pair were estimated to be worth £175m in the Sunday Times Rich List 2006.
Mr Shaw, who previously worked with Hohn as chief operating officer of TCI until 2006, is responsible for product development, marketing and client service for alternative investments (hedge funds) at the fund management giant Black Rock. Mr Shaw joined BlackRock following a merger with Merrill Lynch Investment Managers in 2006. At MLIM, he was the head of alternative investments.
Mr Zimmerman, above, was one of five co-founders in 2003 of NewSmith Capital Partners, a global investment firm. Before joining the fund he was joint chief operating officer of Merrill Lynch Investment Managers, the asset management arm of now-defunct investment bank Merrill Lynch.
Mr Hohn, set up The Children's Investment Fund (TCI) in 2003. The fund gives a percentage of earnings directly to its charitable arm, the Children's Investment Fund Foundation. He has been one of the pioneers of activist investing, and forced the Dutch bank ABN to put itself up for sale in 2007 , then after it agreed to be bought by Barclays, to tie-up instead with RBS, which made a higher counterbid which the Dutch bank had initially rejected.