AND HERE IS the latest in the brilliant thoughts of Mr Kwong Ki-chi, a man who just cannot get it into his head that he has left government to take a job in finance and whom we shall therefore have to redesignate as the secretary for exchange services.
Mr Kwong says that Hong Kong Exchanges and Clearing, where he is boss (and which he runs with about as much skill as I could run a space launch), has appointed three fund managers to invest a portion of its HK$4.5 billion reserves in securities and high-yield bonds as this would achieve better investment returns, thus enhancing profits.
Now shift the scene for a moment to Long Term Capital Management (LTCM), a big American hedge fund that went spectacularly bust three years ago from pursuing enhanced profits through high-yield bonds.
LTCM's game plan was a clever one. American universities had led the world in new techniques of pricing risk. The rapid emergence of the options market in the 1980s, for instance, was the result of something called the Black and Scholes model, the product of a Mr Fischer Black and a Mr Myron Scholes, two academics who in 1973 devised equations to solve problems that had been troubling others for years.
So the folks at LTCM asked themselves a simple question. Why not hire some of these clever people? If anyone could figure out whether the yield on any given security outweighs the risks associated with that security and does so more than for any other security then surely these bright boys could do it.
LTCM thus scoured the campuses for such geniuses and put them to work. Well, you know the results. They couldn't do it. Even the very brightest academic thinkers could not outsmart the market. It turned out they were the ones left smarting. Bye-bye LTCM.
What Black and Scholes had done was explain how the market for options works. They had not devised a market-beating system that would make speculators who used it rich. Even if they had, the market would soon have adjusted to this new system and those speculators would have been back at square one.
