It’s the Schwed Test: was your money stolen or did you just lose it?
The hurricane season has opened early in Florida, where a hedge fund has blown away, leaving some seriously rich investors seriously poorer. The $250 million question, so their attorney says, is whether the money was lost, stolen or strayed. The two Koreans who managed the fund seem to have left town, so it is no use asking them, but the money is unlikely to blow back again, and the attorney’s question was first raised by Fred Schwed in his Wall Street classic, Where Are the Customers’ Yachts? He put it this way: ‘Was it stolen or did you just lose it?’ The result might be the same, but investors have strong feelings: ‘The burnt customer certainly prefers to believe that he has been robbed than that he has been a fool on the advice of fools.’ Then he can have the satisfaction of shouting ‘Stop thief’ and calling for new laws and tighter regulations. I count on the hedge funds to put more investors to the Schwed Test. Stick a pin in the list — it goes on for several pages — and entrust your money to a manager who offers superior returns from unconventional investments. The returns from conventional investments have been so dreary for so long that this proposition is tempting. It comes, of course, at a price. You will pay a fat flat annual fee and let the manager keep a proportion of your winnings. The losses, if any, you keep for yourself. You are asked to believe that these superior returns derive from superior techniques deployed by superior beings, but they must bear some relation to risk. Do not, for instance, expect to take your money out in a hurry.
Through a hedge, backwards
Some funds have done well by the simple technique of borrowing short and lending long, but even that, by definition, is risky. Some put their faith in a formula, like the Nobel prizewinners who went down with Long Term Capital Management by failing to distinguish the improbable from the impossible. Some look for quick turns. Few are transparent, for that, after all, might give the game away. Quite what risks they may be running, some of their holders will find out the hard way, and whatever the answer may be to the $250 million question in Florida, the Schwed Test will prove a true guide. Schwed himself supplied the answer: ‘Nothing crooked — just bad luck and bad brains met together in an effort to do something that couldn’t be done in the first place.’
A game of two halves
London Stock Exchange 1 (Seifert (o.g.)), Deutsche Börse 0 (after extra time). Now there’s a turn-up for the book. The home side still has to meet Euronext, but if Jean-François Theodore, the visitors’ star player, were to bite on a bad oyster at Wiltons and be carried off the field, our lads and ladettes might get through.... The result does not exactly flatter them. Werner Seifert, Deutsche Börse’s burly striker, had long set his sights on the Stock Exchange. His was the abortive plan described as a merger of equals and labelled, here, a fix called Ix. In the end, the Stock Exchange’s shareholders woke up and rumbled it. This time he went for a takeover, but his own shareholders blocked him. The hedge funds — yes, there they were, out in force — saw the chance of a quick turn. Find something better to do with the money, they said, such as handing it over to people like us. Euronext can be expected to play a subtler game, but its shareholders will be much the same as Deutsche Börse’s, as shareholders are these days, and they might reach the same conclusion.
The family silver
So the Stock Exchange might see its Continental suitors off not so much on its own merits as for lack of them. If that happened, my own bid would be in serious danger of succeeding. You may recall that my strategy would be to sell the basic business of exchanging stock to the people who use it and know what they want from it, leaving me with the lease in Paternoster Square and — more important — the wine and the silver. I shall economise on the directors.
Scope for winks
Giggles are not recorded in the Treasury’s archives, but when Nigel Lawson asked three of his mandarins to draft him a charter for the Bank of England’s independence, they assumed that this was a joke. No chancellor had oppressed the Bank more fiercely. They went to work, all the same, and produced a paper which left scope for nudges, winks and arm-twisting. Even so, Margaret Thatcher would not hear of it, and independence was left for Gordon Brown to declare. In his Budget speech next week, watch him blow a kiss to the Bank, this being his way of saying that independence was his first and best idea. The next chancellor may have a different and more demanding sense of humour.
Income by charter
I am pleased to report that City and Suburban has been officially recognised as public service journalism. Thanks to Tessa Jowell and the Department of Patronage, we now have a charter of our own. Concessions have been demanded and, on our part, freely made. The column’s board of governors will be disbanded and replaced by a board of trustees — spot the difference. We have sworn not to pursue circulation for circulation’s sake. The Department insists on outreach, access and inclusiveness, so we shall fit them in. We were anxious (as, indeed, was the minister) to get all this settled in front of the putative election. The charter guarantees this column’s income for ten years ahead, so that it rises in line with our own private rate of inflation. Everybody with a pair of reading glasses will pay a levy, whether they read the column or not — with exceptions for the over80s and the visually handicapped — and we shall have powers to snoop and swoop on evaders and take them to court. These arrangements, which our competitors can only envy, are based on those agreed by Mrs Jowell with the British Broadcasting Corporation, ranked by her as an institution to be compared with the National Health Service. So admired and envied are they that no other land has had the nerve to copy them. It is something to see City and Suburban in their company.
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