When historian Niall Ferguson, author of The Ascent of Money: A Financial History of the World (Penguin Press, November 2008), warned a banking conference in the Bahamas in November 2005 of troubles to come, nobody would listen. “The theme of my speech was that it would not take much to cause a drastic decline in the liquidity that was then cascading through the global financial system,” he later wrote in the introduction to his bestseller. “I was dismissed as an alarmist.” Nor did many hedge funds heed the signs of hard times to come, and the industry is paying dearly for it now, says Ferguson, who spoke to Contributing Writer Marlene Givant Star.
Alpha: Are hedge funds the culprit in this mess?
Ferguson: A lot of people two or three years ago worried that hedge funds were going to be a source of systemic risk, and regulators all worried that they needed to have more control over them. But, in fact, the crisis, when it began, had almost nothing to do with hedge funds. It had to do with investment banks and off-balance-sheet structured investment vehicles. It had to do with the way securitization works.
Yet hedge funds — and their investors — are as hard hit as any sector. Is there a lesson?
There are a great many devious institutions calling themselves hedge funds that really do nothing more than take money from investors and run risks. A lot of them adopt strategies that are probably going to blow up in a five-year time frame.
Your book raises the prospect of a “great dying of financial institutions.” Can you explain?
A very substantial portion of the hedge funds that were in existence this time last year will not be in existence this time next year — as many as one third, maybe more — because of losses they’ve suffered, and redemptions.
Why did hedge funds proliferate after the failure of Long-Term Capital Management in 1998?
It’s kind of surprising, isn’t it? Especially since they seemed to be doing exactly the same thing LTCM did. The lessons of the LTCM crisis just weren’t learned, or maybe the lesson learned was you can make a great deal of money running a hedge fund for a few years. Just don’t put your own money into it.
Is there any good news?
What hedge funds are about is nimble, highly informed, highly intelligent management adapting to changes in the economic environment. If everything is steady, it’s very hard to get serious returns for your fund without piling on leverage. Now volatility has come back with a bang, which should be good news for funds doing their job right. I can’t think of a better institution to exploit the crisis than a hedge fund.
