View from City Road: Forget sorry Soros and watch mutual funds

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The Independent Online
Lord, make me virtuous, but don't upset my business. George Soros, the fund manager, yesterday acknowledged it would be 'legitimate' for central banks to investigate regulating the activities of hedge funds, the offshore investment vehicles that speculate heavily in derivatives.

'I just hope that whatever regulations they introduce do not do more harm than good,' he added.

In fact, nobody is arguing for hedge funds to be regulated tightly like unit trusts, which would drive them out of business. All central banks and securities supervisors want is to see transparent, consolidated accounts and regular reporting of dealings.

This is not to protect their investors, who can look after themselves, but to ensure that if a fund has a cash crisis it will not bring down the banks and securities firms with which it deals in the derivatives markets.

In his usual disarming way, Mr Soros shared the guilt over the market instability that causes enormous fluctuations in currencies and which lost his fund dollars 600m one day last month.

'I would say that markets have a tendency to overshoot and so I don't believe in the perfect market at all. Therefore, I don't think that hedge funds are perfect either, otherwise they wouldn't lose five per cent in a day . . . so I don't know what is more unsound - our position or the position of the governments which go to fight with each other and create that kind of movement.'

But the self-publicist in Mr Soros is helping to feed a myth of the hedge fund's influence on the markets as a whole. The funds' losses this year and their attempts to retreat from their over-exposed positions have increased volatility at a critical moment.

But to see the funds as the driving force in the markets is to have the tail wagging the dog.

In fact, what should really be worrying investors is the effect of rising short and long-term US interest rates on the investment strategies of perfectly ordinary onshore mutual funds - just like unit trusts - which have doubled in size to dollars 2,000bn in three years.

This is equivalent to 85 per cent of the value of US bank deposits, compared with 10 per cent in the early 1980s, and it happened partly because savers were looking for alternatives to near-zero deposit rates. Think what could happen if the process goes into reverse as interest rates rise.

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