HEDGE (Hog) FUNDS

“Monopolies, oligarchy, the striving for domination and not for freedom, the exploitation of an increasing number of small or weak nations by a handful of the richest or most powerful nations – all these have given birth to those distinctive characteristics of imperialism, which compel us to define it as parasitic or decaying capitalism. More and more prominently there emerges, as one of the tendencies of imperialism, the creation of the ‘rentier state’, the
usurer state, in which the bourgeoisie to an ever-increasing degree lives on the proceeds of capital exports and by ‘clipping coupons’. It would be a mistake to believe that this tendency to decay precludes the rapid growth of capitalism. It does not. In the epoch of imperialism, certain branches of industry, certain strata of the bourgeoisie and certain countries betray, to a greater or lesser degree, now one and now another of these tendencies. On the whole, capitalism is growing far more rapidly than before; but this growth is not only becoming more and more uneven in general, its unevenness also manifests itself, in particular, in the decay of the countries which are richest in capital (Britain)” — (Lenin, V. I., Imperialism: The Highest Stage of Capitalism)

I’m not holding my breath waiting for it, but just once I would love to see the headlines screaming from the financial pages of the capitalist press: “Lenin Vindicated!”

The fall-out from the US sub-prime crisis reveals more and more every day about the “parasitic and decaying” characteristics of imperialism outlined by Lenin in his 1916 book “Imperialism: The Highest Stage of Capitalism”.

Indeed, as author Robert Biel observes: “Today's capitalism, dominated as it is by currency speculation, the futures market, and so on, has become parasitic in ways that Lenin could scarcely have imagined, strongly confirming his argument that these are characteristics of mature capitalism, which it will never shake off. In this sense it is still correct to see imperialism as ‘the highest stage of capitalism.’ But despite this, it is important to recognize that imperialism can still undergo large-scale change as it acquires new regimes of accumulation that allow it to be parasitic in new ways.” (Robert Biel, The New Imperialism: Crisis and Contradictions in North/South Relations, Zed Books, 2000)

One of those new “regimes of accumulation” through which capital displays its parasitic essence is the hedge fund, an entity currently the subject of loud denunciation in the financial pages for its manipulation of the Australian stock market, the Australian Securities Exchange (or ASX).

We’ll come back to examine that claim later.

First, what is a hedge fund?

Hedge funds are companies that manage the finances of the super rich, seeking huge gains very quickly not by any activity that is related to the production of material goods or services, but by feeding parasitically off the finances tied up in stocks, bonds, and debt packages and so on.

They are a partner in crime to private equity funds. Where hedge funds strip mainly the stock exchange, private equity funds buyout companies and strip them of their assets for high rates of return, diminishing rather than expanding the bought out company’s productivity.

Like private equity funds, hedge funds are largely a phenomenon of the ascendancy of US imperialism following the Second World War. US monopoly capitalism made super profits out of both sides of that conflict, standing aside like a school yard bully while the little kids punched each other out and happily selling sticks and stones to all of them, then jumping in at the end following a foolish blow to the nose from an upstart who was supposed to be punching someone else, and then emerging from the fray with no further physical damage. All the other fighters were cut and bleeding, so the bully went on to state the terms and conditions under which he would patch them up and get them to make money for him. A couple of the kids wouldn’t cooperate, so he turned on them and called them names and declared that the century to follow was undeniably his!

The victory of the War Against Fascism weakened all the imperialist powers except the US. US monopoly capitalists had huge reserves of investment capital and directed them into reproduction of their own value in the form of surplus value from the production labour of workers of all countries in the capitalist world. The capital that came back to investors from new factories, mines, forests and farms (primary and secondary industries of all types) was a variable form of capital, but to make it, investors also had to lose part of their capital in the constant, unchanging form of manufacturing plant, buildings and so on. The biggest investors, long used to playing the stock market, sought more and more opportunities to avoid loss through investment in constant capital, and were insatiably attracted to parasitic and non-productive opportunities for a quick return.

Lenin had already described this, in 1916, as the “economic basis for imperialist ascendancy” in this passage from “Imperialism”: ‘“Great Britain,” says Schulze-Gaevernitz, “is gradually becoming transformed from an industrial into a creditor state.” Notwithstanding the absolute increase in industrial output and the export of manufactured goods, there is an increase in the relative importance of income from interest and dividends, issues of securities, commissions and speculation in the whole of the national economy. In my opinion it is precisely this that forms the economic basis of imperialist ascendancy. The creditor is more firmly attached to the debtor than the seller is to the buyer.’

Private equity and hedge funds are post-war manifestations of this phenomenon of imperialism.

Both operate independently of the stock exchange and are not subject to any real supervision or regulation. Speculation is raised to the level of an economic lever on the whole of the national, indeed international, economy.

So, what are the forms of activity of hedge funds, and why are they coming under fire from the officials of the ASX? Let’s return to an examination of the claims against hedge funds that have dominated the financial pages in recent weeks.

On 15/2/08, in “ASX probes hedge collusion”, we read: “The Australian Securities Exchange yesterday signalled that it would investigate allegations that hedge funds are colluding to push down the shares of major Australian companies. ASX head of supervision Eric Mayne yesterday said that he would be investigating market rumours that hedge funds were working together in packs to target specific companies.”

(“Working together” to manipulate the market for gain benefits from, and is a form of, insider trading which occurs when people with prior knowledge of information that relates to a company release that information to others who gain by it. Insider trading was described in another article in the Australian, on February 20, as “so rife in the Australian stock market it may be weakening the reputation of the local bourse…”)

The February 15 article was referring to the practice of short selling which means selling shares at, say $10 each, often with rumours about how much trouble the company that the shares represent is in, thus forcing other smaller investors who together might hold a sizeable aggregate number of shares to engage in panic selling, only for the hedge fund to then turn around and repurchase all or most of the now available cheaply priced shares (at say, $5 each) which bounce back up to their original value, or higher, at a tremendous windfall profit to the hedge fund. And all in the space of a few hours, or a few days or weeks at the most.

This volatility in the share market is largely created by the hedge funds who, like hogs at a trough, come charging in snorting and grunting to scare off the little sparrows that were picking at the edges, then settle down to enjoy the slops that they’ve just commandeered.

“Pooping and scooping”, as this practice is called, is illegal and hence the ASX investigation. The hurdle to the investigators, however, is that hedge funds operate from places such as the Cayman Islands and getting them to make any sort of a disclosure against their own interests is virtually impossible.

Thus, Leighton Holdings, Australia’s largest building contractor, a subsidiary of Germany’s giant Hochtief Corporation, appears to have been sold short on the 14th of February, with shares dropping 11 per cent from $54.33 to $45.60 despite an announced 33 per cent increase in profits. Why would investors flee a blue chip company making those sorts of profits? The Australian reported: “It is believed that hedge funds were involved, yet again. A broker, who asked not to be named, said: ‘I have no doubt that the fast-money guys bought stock on the back of a statement from Hochtief overnight.”

Hedge funds are also quite adept at the “pump and dump”, the mirror image of the “poop and scoop”. With a “pump and dump”, the rumourmongers artificially inflate the value of a company’s shares, and then sell them in vast quantities to make their profit. Stock market based chat rooms on the internet and spamming make these illegal practices incredibly easy for the hedge funds to operate.

On February 16, the Australian reported under the heading “Stock ‘loaning’ racket. Traders plunder super” that the ASX was reporting strong “evidence that hedge funds are ‘borrowing’ shares from superannuation funds to force down prices, a practice that is mauling retirement savings.”

Superannuation funds are some of the largest owners of shares in other companies, and use those shares to meet their liability towards paying super to retirees. Share lending is yet another completely parasitic activity. Shares are borrowed by the hedge fund for a fee paid to the owner, then short sold in a falling market and bought back again at a cheaper price afterwards. Providing the fall can be manipulated to provide a sufficiently profitable margin on the money made from the sale of the shares compared with the lesser amount required for their repurchase, the fees paid to the owner for the “loan” can be met and a sizeable profit made as well.

According to a report in the Weekend Australian on February 16-17, 2008, David Bryant, group executive of investments at Australian Unity, which has $6.4 billion in funds under management, likened the practice to "leaving a car in a car park, which lends it to local hooligans who return it damaged. The owner is left with the mess. "

Of course, with share lending, it is crucial for the hedge fund that a share it sells for $10 can be repurchased for a lesser amount, say $8. The profit is $2 less the fee, say 2 cents, that is, $1.80. Multiply that by many millions of shares and the cost of pina coladas in the Cayman Islands look cheap indeed.

Indeed, the quintessential parasitism of short selling is to neither own the shares yourself, nor borrow them from a third party to whom you pay fees, but to simply sell phantom shares, shares that do not even exist, force prices down in a “poop and scoop”, then use the money you’ve scared out of little investors to buy real shares at below value, and then “pump and dump” and make a squizzillion.

Such is the size of hedge fund operations that even companies as solid as the bank, namely the bank, can get shafted. By the end of last week all the focus was on the big four Australian banks, the Commonwealth, the ANZ, National Australia Bank and Westpac which were being short sold by hedge funds. “They’ve terrorised the Australian market,” said the adviser for a leading Securities firm. “Apart from the inflation rate, our economy is the best it’s ever been in the history of this country, and out stock market has suffered the biggest losses,” he said. The ANZ had just written off $US200 million to cover bad debts and its share price dropped by 6.1 per cent. For the ANZ, Australia’s third largest bank, that meant a decline of share prices of the order of 29 per cent since last October. The other banks suffered similar losses in share prices with the Commonwealth reporting a $100 million blowout in the cost of funding its loans and a 71 per cent jump in its corporate bad debt provisions.

Just as retirees are the ultimate losers in the speculative games played by hedge funds, so home owners are being made to pay for the losses caused by short selling of bank shares. This is the reason that the banks have been putting their rates up faster and higher than the official Reserve Bank interest rate rises: in proportion to what the hedge fund “hogs” slurp out of the bank trough, so the banks dig their avaricious fingers deeper into the pockets of home buyers to make up the loss.

The irony in all of this is that the business community, which has long paid for politicians to espouse the virtues of free market capitalism and to disparage regulation and control by governments, is now to be heard shouting precisely for regulation and control for its own protection from speculative and parasitic market forces.

Thus, Eric Mayne from the ASX said that the stock market was “keen for more regulation…of short-selling”. The Australian quoted unnamed fund managers who said that “share lending should be curbed and regulated”. The major shareholder in a boutique investment bank, Caliburn Partnership, called for “moves to strengthen regulation and deter market manipulation.” The chief executive of the ASX, Robert Elstone, called for the federal government to expedite changes to the Corporations Law to ensure greater disclosure of short-selling positions.

And so it goes on.

Did I hear someone say that Lenin was right?