The View

Are there any smart people left in finance?

The hedge funds’ supposed investment superiority has been unable to deal with new, unpredictable outcomes and actions that make no sense

PUBLISHED : Friday, 05 February, 2016, 8:37am
UPDATED : Friday, 05 February, 2016, 12:20pm

Just after the US Fed tried to resume some semblance of interest rate normality markets have already lost about US$5.7 trillion coming into 2016. The market is either in panic mode or experiencing problems coping with the resumption of disciplined risk pricing. Higher volatility in December made every asset class take losses in January.

Attending presentations and meetings, where analysts try to make sense of these markets, is like rewatching the movie Inception – even after multiple viewings no one can explain the illogical events and then you find out the entire story was a confusing dream. You can smell the fear and confusion coming off the Powerpoint presentation as they desperately seek and dispense factoids from their Bloomberg machine to show a soft landing or dispel the notion that financial apocalypse is near.

This made last month’s research note by RBS an especially audacious piece of institutional financial analysis because it simply said sell everything to save your portfolios from the impending doom.

Banks generally don’t allow their analysts to peddle apocalyptic scenarios because they are too risky for their reputations. Research analysts make their money by identifying trends- price, economic or market targets over a certain period, and convincing clients to trade into it. Calling an “End of Times” market is unprofitable and possibly career suicide. So that’s why it’s usually territory covered by blogs, independent research outfits and self-styled gurus.

Banks generally don’t allow their analysts to peddle apocalyptic scenarios because they are too risky for their reputations

Anyone working for a major financial institution or investment manager must abide by some version of the perfect market hypothesis where markets eventually and accurately price assets. But, for the last eight years government intervention has twisted markets to the point that prices didn’t make sense.

Financial professionals have no choice but to cling to the canon preached by business schools otherwise the whole philosophy and exhortation about maintaining a long term, balanced portfolio would quickly self-destruct. Asset managers can’t make a living if clients hold cash.

Many investors seek refuge in hedge funds when markets are falling apart. Hedge fund managers are supposed to be able to navigate volatility. But the funds that are supposed to protect you or help you profit from volatility are themselves being blindsided by volatility that they simply cannot predict or rationalise. Nothing makes sense in the current market. More hedge funds have closed shop in 2015 than in any year on record.

The hedge funds’ supposed investment superiority has been unable to deal with new, unpredictable outcomes and actions that make no sense. Governments like China suddenly intervene and buy entire groups of stocks. Central banks buy massive amounts of their nation’s debt. Money is interest free for banks. The real travesty is that average savers who were scared and avoided the stock markets over the last eight years have been robbed of any real returns on their deposits.

Government policies have made it almost impossible for many hedge fund strategies that depend on rational monetary actions and reactions. Part of the problem of predicting markets is that there is no “correct” price for shares- or anything else like oil. Even looking historically you really can’t answer the question. Were prices wrong then or are they wrong now? Clearly, neither.

But then, hedge fund managers are supposed to be the smartest financiers. Maybe the market has become too complex to even identify and manage risk in some situations. Perhaps the market participants like the algorithm traders are so far out of touch with the real economic world they forgot that what’s happening to the real economy actually matters – someday.

It makes you wonder if there are any smart people left in finance. Or if anyone is paying attention to the real facts rather than just trying to meet compliance rules, hit their (retirement) “number” and retire.

In Hong Kong, private bankers and wealth managers can’t convince clients to diversify outside of local property and commit to a long term, balanced portfolio. The biggest challenge is that pretty much anyone who has made money in Hong Kong has done it through property even if it was just through owning their own flat. And the truth is Hong Kong residential property has been a proven winner decade after decade rising about 340 per cent since 2003.

So as we head into a new (Chinese) year, investors can hope for more luck again. They will need it. As the Yiddish saying goes, “Man plans. God laughs.”

Peter Guy is a financial writer and former international banker