18/08/2010 Author: Andrew Baker

Comment: Andrew Baker

We have heard a lot about speculation recently. Whether it has been cocoa in particular or commodities in general, the pound, the euro or sovereign debt, policymakers and self-appointed experts have queued up to attack “speculators”, whose activities are allegedly ruining markets, bringing down currencies and economies, and even threatening to make chocolate more expensive.

Some of the language used has been pretty choice. Some leaders talked of Europe being “under attack” from speculators. Jean-Claude Juncker, the Prime Minister of Luxembourg and head of the Eurozone Finance Ministers’ group, commenting on a possible collapse of the currency zone, told Handelsblatt: “We have the instruments of torture in the basement, and we’ll use them when it’s necessary.”

During the sovereign Credit Default Swap (CDS) crisis there were even reports that the intelligence services of various European states had been told to find out who the speculators were. One Greek newspaper reported that the Greek intelligence services had managed to “unravel the strands of speculation entangling the country,” and that they had identified the British and American sellers of Greek bonds.

Perhaps they would have been better off looking closer to home. It has since emerged that some of the biggest buyers of protection in the Greek sovereign CDS market were not hedge funds, but actually Greek banks, with the other substantial players in Greek debt being French and German banks. In fact, 95% of Greek debt is held inside the Eurozone (i.e. not in the UK and US). So much for ‘Anglo-Saxon’ speculation.

It’s all too easy to attack ‘speculation’ because it is almost impossible to differentiate between speculation and trading in general. In fact, the very use of the word misunderstands the marketplace. Who in the marketplace is not there to profit? Either everyone in the marketplace is a speculator or the distinction is meaningless.

It is an old joke that foreigners haggle, while the British negotiate. One is merely a pejorative term for the other, and you could make precisely the same point about speculation and trading. But the consequences of these attacks on speculation are no joke. Policymakers have used speculators as a scapegoat to be blamed for any ill, regardless of the facts. And nor has their rhetoric been merely empty threats. There have already been very real examples of action taken – such as the recent unilateral German ban on naked short-selling.

All this matters because when people talk about speculators they’re not talking about all financial market participants. They’re not even talking about the banks. They actually mean us – the global hedge fund industry.

There is a way to neutralise ignorant and prejudiced attacks like these, and it is education. Making people understand that our industry is not part of the problem, but part of the solution. Showing them that we genuinely contribute to the economies in which we operate and to the global economy as a whole. Not only in terms of delivering returns to investors, and price-discovery and liquidity to markets, although that is important, but in real tangible terms that people really understand.

Jobs are one important example of that, but perhaps even more important is the social dimension the industry now has as the guardian of many people’s pensions and savings and the facilitator of their business loans and mortgages. In many instances it is hedge fund activity that enables pension funds, insurers and banks to offer the services they do, because they are niche operators capable of assessing and pricing risks that others are unwilling or unable to undertake.

Ultimately, the best antidote to attacks on speculation is to demonstrate the social utility of financial services in general and our industry in particular. If our industry is perceived by policymakers as rich people making money for rich people using borrowed money, then they will not hesitate to impose punitive regulation. If they understand that we are a vibrant, creative and indivisible part of the asset management sector delivering real and important benefits to society, they might think twice.

Aima, as the global industry body, is at the forefront of activities on behalf of the industry to demonstrate the importance and relevance of what we all do. We seek to provide a forum for all communications professionals in the industry to discuss and co-ordinate messaging. Please do contact our team if you’d like to be involved.

Andrew Baker is the CEO of the Alternative Investment Management Association (Aima)