Socialist Worker

Hedge fund successes are not staked on a no-deal Brexit

A new theory claims hedge funds are pushing for a no-deal Brexit in order to boost their profits. Simon Basketter explains why this makes for a poor conspiracy theory

Issue No. 2675

Hedge funds make money by betting on risks in financial markets

Hedge funds make money by betting on risks in financial markets

Boris Johnson’s Brexit strategy is being driven by hedge funds ­hoping to profit from a no-deal Brexit. This is a recurring conspiracy theory.

It is shared by a former Tory chancellor, Philip Hammond, and the man who would be Labour chancellor, John McDonnell. Neither of them understand well the system they want to manage.

Hedge funds are private investment companies that bet on the movement of shares, debts, ­commodities and currencies.

Hammond wrote in The Times newspaper, “Mr Johnson is backed by speculators who have bet billions on a hard Brexit—and there is only one option that works for them—a crash-out no-deal that sends the currency tumbling and inflation soaring.”

Labour has since called for an inquiry into Johnson’s links to hedge funds. But a former advisor to John McDonnell said that Hammond “should know better than to ­promote” the theory.

One estimate, claimed by the Byline website among others, is that £8.5 billion has been bet against or “shorted” on companies that will do badly out of Brexit.

The line of thought is that if Brexit is bad for the economy, then speculators win. Speculators back Johnson, so Johnson backs Brexit.

But capitalism is more complicated. Hedge funds are a way for very rich people to get even richer. They do not support Johnson.

Brexit does have support in some parts of the City and among a handful of Britain’s wealthiest. This support is in notable contrast with the determined opposition to Brexit among the bulk of Britain’s bosses.

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Hedge fund boss Crispin Odey made more than £200 million ­betting on a big drop in sterling after the European Union (EU) referendum.

He donated £900,000 to the Leave campaign. But the biggest single donor was Lord Sainsbury, who donated £4.2 million to the Remain campaign. Of the £16.4 million contributed by the top ten donors to either side, 58 percent went to Leave and 42 percent to Remain.

The link isn’t as clear as it appears. Hedge funds are currently betting that Cineworld will fail. But 75 ­percent of its revenue was from the US. Brexit is not the reason for the bets.

The most-shorted companies of recent months had nothing to do with Brexit. Thomas Cook had too much debt, as does construction company,the Kier group.

This is shamefully making cash out the collapse of companies such as Thomas Cook. But this is not explained by Brexit.

Posh bigot Jacob Rees-Mogg has an offshore trust that makes money in the speculation scams mostly in the developing world. Some his investments will benefit from a stronger EU, some of them from a weaker one.

But his key concern is making sure that these funds and ones like it operate in secret and don’t pay tax.

Hedge funds designed for super-rich to pocket cash

Hedge funds are largely unregulated pools of money from the biggest financial institutions and the extremely wealthy.

Banker Karl Miller described them by saying, “Hedge funds were designed to loot shipwrecks.”

The stated purpose of these funds is to minimise some of the risks in financial markets—to “hedge” the bets.

In reality, however, these funds typically take enormous risks. Many invest heavily in complex financial instruments known as derivatives, rather than simply buying stocks.

They are the beneficiaries of the explosive growth in global offshore finance.

Britain has been turned into a tax haven alongside an elaborate system of trusts to hide the money of rich people.

This was how Britain’s wealthiest families shielded their fortunes.

It has developed an entire economy designed to service the ultra-rich.

For instance, Crispin Odey of Odey Asset Management has big short positions against Intu Properties, which runs shopping centres and against Debenhams.

But he also has a big position against Lancashire Holdings, a London and Bermuda?based insurer involved in aviation, energy and marine insurance.

So he is essentially betting on natural disasters doing over the insurers.

Bosses’ beef with the EU

The hedge fund industry believes it should be exempt from the few rules that govern the rest of the bosses.

Some are against the EU’s Alternative Investment Managers Directive which came in the aftermath of the 2008 global financial crisis.

It imposed some modest reporting requirements on the sector.

Importantly, the impact of these rules was zero.

But they were resented nonetheless.

What is short selling?

Hedge fund traders take shares “on loan” for a given period of time.

They used to borrow money to buy the shares but now they just borrow the shares.

They sell them immediately in the hope the price will drop and then buy them back at a later date—hopefully at a lower price so that they can pocket the difference.

Futures contracts involve placing enormous bets on what the price of a commodity will be at a given time.

Futures are the simplest examples of derivatives—financial instruments whose value is “derived” from another simpler instrument.

Rather than holding debts and collecting interest payments, companies merged them together and sold them as bonds. Others then gamble on the prices of these bonds.

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