Monday, 27 September 2010

He wins - so who loses?

The Daily Mail reports on the man who earned the highest salary in the city last year. He managed to take home a cool £60 million from the profits of his hedge fund management company. According to the story, the profits come from successful betting on the futures markets.

At first reading, this is simply a story of a clever and successful man, who's turned his mathematical skills to making money, lots of it, by trading. The question that I wanted an answer to though seems not to have even been asked by the newspaper.

If he and his accomplices are making these vast amounts of money, who's losing them? Because 'hedging' is not a victimless process. As with any other type of betting, for every £ won by one person, someone else has to have lost a £; the money doesn’t just appear out of thin air.

I have a feeling that the answer to my question is actually “the rest of us”.

1 comment:

Siônnyn said...

". . .the money doesn’t just appear out of thin air."

Yes it does! Or at least it has done over the last 10+ years, where 'off balance sheet' instruments like complex derivatives became the norm!

Of course, like a pyramid selling scheme, eventually the whole thing collapses (2008 -) and you are right- the rest of of us pay for it!

We pay for it in other ways - the 'short selling' scam - where hedge funds bet on share prices falling - and actually manipulate the market by flooding the market with the offer to sell shares that they don't own. It drives down the share price (simple supply /demand equation).

The whole scheme depend on our pension funds being willing, for a short term bit of extra income - 'Lending' them the shares so that they can be delivered to the counter party. Of course, by then the price has fallen, and so the borrower (the hedge fund) can buy the shares that he has to return to the lender at a much lower price than that at which he 'sold' the shares at!

Derivatives and short selling are not the only reason the whole financial system collapsed, but they, and the mindset that engendered them, played a large part!