A lot of fuss is made about the dangers of speculators in commodity markets. But who is a speculator and who isn’t is based on a definition drawn up in the early part of the last century in the United States. The definition is no longer valid and anybody looking at those reports should be wary of drawing any firm conclusions.

For a start the word “speculator” with negative connotations is applied to pension funds, which invest over the long term to provide retirement income for many people around the world. Hedge funds are normally speculators but if they have hold the physical commodity then they can say they are commercial hedgers. Taking this theme a little further many natural resource companies run their Treasuries as profit making centres, which encourages them to trade the commodities they produce.

The London Metal Exchange has said it won’t go down the route the CFTC has and publish a weekly report detailing speculative long and short positions because there is no clear definition.

The CFTC bowing to popular pressure has continued to provide these weekly reports detailing long and short speculative positions, which ultimately could be misleading and make scapegoats of all investors whatever their ilk.

For better or worse, hedge fund returns have a tendency to follow markets, in part because most long-short funds are net long most of the time.

So after a huge rebound in the stockmarket this year, which has helped hedge funds make up some much-needed ground, October proved a difficult month when the market fell in the second half of the month.

After all 2009's growing optimism, investors were suddenly concerned that a withdrawal of government stimulus would harm an economic recovery in its early stages.

So, after a bumper 2008 and a miserable 2009 for short-sellers, it was they who leaped to the fore again in October - dedicated short bias returned 1.61 percent, while long-bias funds lost 0.38 percent and long-short funds were flat.

However, the long bet may not be over for hedge funds. John Paulson, the man who made billions betting on the subprime crisis and profited last year from shorting banks, is going long Cadbury.

With 2.54 percent of the chocolate maker, Paulson's move may show that, despite this year's huge rally, there may be more upside left in some stocks.

Gordon Brown is truly having a rough time. Rebuffed by the United States, International Monetary Fund and others for floating the idea of a tax on financial transactions at this weekend's G20 meeting, he has now got short shrift from the Cayman Islands.

McKeeva Bush, the veteran Caymanian politican who is now premier of the British Overseas Territory, popped in to the Reuters London headquarters for a chat this week. His main concern was to explain plans for making the islands an easier place for financial services personnel to live in. He would like some of those 8,000 hedge nearly 10,000 funds that are registered there to be more than just brass plaques. But, when asked, he also had time to dismiss the idea of a transaction tax out of hand.

"That's an old hat. I have been hearing about it for 25 years. It's just not practicable. It will not work."

And just in case the point was missed:

"We have looked at it and we do not think this is something that would work."

Bush would not be drawn on the idea that a tax on transactions could, metaphorically speaking, sink his Caribbean island homeland under the waves. But Paul Byles, a government financial services consultant who accompanied the premier, did touch on the liquid nature of the issue:

"Tax flows, and they will move somewhere else."

At least 20 of the 30 biggest hedge funds boosted their positions in financial institutions in the last quarter, a sign that Wall Street is ready to bet on more risky sectors in the hope of longer-term rewards.

The push into financials indicates fund managers including Steven Cohen and John Paulson -- closely watched as barometers of risk -- have shifted from routine merger arbitrage plays to directional bets with more reward potential.

More coverage analyzing the Smart Money:

Paulson's AngloGold bet points to inflation

Betting on a takeover of CF Industries Holdings

Turns out Goldman Sachs is a staunch advocate of going organic -- when it comes to the money management business.

As Barclays auctioned off its Barclays Global Investors unit this year, Goldman was widely seen as a likely acquirer. That is until Blackrock In under Larry Fink emerged as the buyer with a $13.5 billion deal.

Lots of other money managers are expected to be sold, as the industry consolidates and cash-strapped banks look for valuables to pawn. But Viniar told analysts Goldman's preference is to grow the business without deals, and appeared to question the very idea of money manager deals.

"If there were an acquisition that made sense financially for us to do, we would certainly consider it," he said, something he says every three months to calm down excitable analysts. "When we look at the prices of most of the acquisitions, we think that they haven't made sense in that you've had to assume really heroic growth rates that we don't think are realistic." 

Jefferies Putnam Lovell recently said it counted 35 management deals in the second quarter, compared with 52 deals a year earlier. Besides the BGI takeover, Aquiline Capital Partners acquired Conning & Co,  JPMorgan Chase bought the remainder of its Highbridge Capital Management hedge fund unit and Woori Finance purchased Credit Suisse's 30 percent interest in a joint venture.

Yet Viniar notes money management firm deals are tricky, since buyers have to pay a premium for the company and then put up more money to retain star managers. And even as billions of profits come sloshing into Goldman's coffers, Viniar apparently doesn't like to part ways with the firm's cash.

"It has taken a while, but we've grown (the asset management business) quite successfully, almost exclusively organically." he said. "And the high likelihood is that is the way we are going to continue to grow it in the future."

(Photo: A customer walks past organic products in an organic food chain store in Taipei/Pichi Chuang)

Master-fraudster Bernie Madoff is the invisible guest at an annual fund fest in Luxembourg, the European capital for fund administration.

Even though the former Nasdaq chairman is under arrest thousands of miles away from this discreet financial centre nestled between Belgium, France and Germany, his presence was omnipresent. Fund managers just can’t stop mentioning him.

 One example: “The hedge fund bubble has popped. The market bubble has popped, and to put a cherry on the top you had the Madoff probe in December,” said Ken Kinsley-Quick from hedge fund Thames River Capital.

Other speakers have gone into deep soul-searching, accepting that more transparency and due diligence is needed. But few would openly beat their chest and admit any wrongdoing as they all seemed to agree that if the Securities and Exchange Commission could not catch Madoff’s wrong doing over 20 years, no-one could.

“Except for a few whistle blowers no-one had expected anything. I really do not think that custodians did not take their role seriously. But it’s not helping the industry,” Yves Francis, a partner from Deloitte said.

Even Luxembourg’s budget minister, Luc Frieden, got into the act, suggesting that a deal should be made out of court to compensate Madoff investors who had gone through Luxembourg-based investment vehicles.

He clearly wanted Madoff to just go away.

(Reuters photo: Mike Segar)

Another in our series of one-minute managers. This time it is Ken Kinsey-Quick, who heads up multi manager investing at Thames River Capital. He reckons the old days of buying and holding equities over the long term are gone for good. Is he right?

(more…)

Nothing like a bit of toxicity. Wealth managers at Citi are telling their clients to watch for a burst of hedge fund interest in bad assets. They reckon the biggest opportunity for hedge funds is probably around the Public-Private Investment Fund, which is part of the huge U.S. plan to stabilise the financial sector.

The idea is that the U.S. government will lend money to investors to buy up toxic assets from banks, thus setting a market price. But the notes are non-recourse ones, which means that any default is limited to the actual cost of whatever collateral is require. In short, it limits liability if asset prices fall.

As a result of this, Citi says, hedge funds are likely to find the system attractive. But it warns: "Returns are likely to be volatile, at least in the near term. To take advantage of these new opportunities, investors need a long time horizon and a lot of patience."

Most hedge funds agree that the credit crisis has thrown up some interesting assets at bargain-basement prices, particularly in credit markets.

The problem? When you have to report net asset value performance to jittery investors and prices of these cheap assets are getting even cheaper, when do you buy?

That's the dilemma facing many fund managers, some of whom have got burned by snapping up asset-backed securities and other assets too quickly.

After all, a security that has fallen 90 percent is one that has dropped 80 percent and then halved.

Chris Woods, chief investment officer at Man Global Strategies, speaking at Wednesday's Euromoney bond conference in Westminster, helps us out.

"Just as 50 is the new par, so early is the new wrong," he says.

As investors have found, it may be cheap, but it could get a lot cheaper.

It was the outcome most commentators were expecting.

Even Roger Lawson of the UK Shareholders' Association, which represented 150,000 small investors, admitted it was "not totally unexpected".

But the defeat for hedge funds RAB Capital and SRM Global and other former shareholders claiming damages for the loss of their holdings in Northern Rock when it was nationalised last year is nevertheless a hard blow to bear.

The former shareholders may appeal, but a valuation of the equity at zero or close to zero is now looking entirely possible.

As if that wasn't painful enough, Liberal Democrats economic spokesman Vince Cable, according to the BBC, said today that SRM and RAB "deserve to lose their shirts" and that "we should not reward such cynical and reckless speculation".

Like many investors trying to catch the proverbial falling knife and pick up stocks on the cheap after the onset of the credit crisis, the Northern Rock situation turned out far worse than RAB or SRM expected.

At some point there will come a time when assets -- be they equities, bonds, property or anything else -- will present historic buying opportunities. But as many hedge funds have found out, being early can be far more painful than missing out on some of those tempting bargains.