Hedge Funds: Courtesans of Capitalism: The Courtesans of Capitalism [Hardcover]

"the book is an excellent primer for students of finance and would–be masters of the universe."
(Sunday Times, 1st April 2001)

"a good introduction to the world of alternative investments."
(Portfolio International, April 2001)

"Peter Temple′s book is a good starting point. Read it before you open that next tempting new prospectus from the glitzy investment bank."
(The Independent, 2nd May 2001)

"a wonderful book".
(Personal Finance, September 2001)

"a good introduction to the world of alternative investments."

"a wonderful book".

Like the courtesans of a bygone age, hedge funds cater to the wealthy and project an aura of mystery and excitement. But as the Long Term Capital Management debacle showed, their activities affect us all.
Far from neutralising risk, as their name might suggest, some are simply vehicles for large–scale speculation – raiding currencies, disrupting bond markets, and embarrassing governments.
This book looks in detail at the secret world of hedge funds, how they work, the larger than life characters who run them, their private passions and the risks they run.

This book is about hedge funds, their influence on the global financial markets and how they affect us all. Hedge funds have come a long way since Alfred Winslow Jones first used them in the 1950s and ′60s to reduce risk. Hedge funds today can wield immense power capable of disrupting the financial markets.
More alarming still is the hedge fund in your bank, epitomised by so–called ′proprietary trading′. Banks trade with, lend to, and mimic hedge funds in their own trading – generating fat bonuses for their managers. Customers rarely know, let alone are consulted about it. As with many other ′enthusiasms′ to which banks have been prone, it may end in tears.
The book′s controversial conclusion is that it is banks′ exposure to hedge funds and their sometimes inept proprietary trading that needs to be regulated more closely. It is in the urgent interests of the global banking system as a whole, and concerns all of us.

Like the courtesans of a bygone age, hedge funds cater to the wealthy and project an aura of mystery and excitement. But as the Long Term Capital Management debacle showed, their activities affect us all.
Far from neutralising risk, as their name might suggest, some are simply vehicles for large–scale speculation – raiding currencies, disrupting bond markets, and embarrassing governments.
This book looks in detail at the secret world of hedge funds, how they work, the larger than life characters who run them, their private passions and the risks they run.

PETER TEMPLE worked as an investment analyst in fund management and broking for 18 years, before turning full time to writing in 1988.
He writes widely on financial topics, mainly for a private investor readership. His articles are published in the Financial Times, the Investors Chronicle, Shares magazine, International Fund Investment, and a variety of other publications and websites.
His previous books cover topics like online investing, investing for beginners, venture capital, and trading options.
Peter and Lynn Temple live in the London suburbs in Woodford Green, but travel widely. They have two grown–up children, both professional musicians.

Chapter One - Courtesans of Capitalism

Courtesan. N. It. Cortigiana (f. of cortigiano - courier) A prostitute, especially one whose clients are wealthy or upper class - Oxford English Dictionary

This is a book about hedge funds and their influence on the financial markets, and on you and me. It is not about upmarket prostitutes or the seamier side of life. Yet when I began writing this book, the parallel struck me forcibly between the courtesans of a bygone age - their trade since undermined by a less rigid moral code - and the grip that hedge fund managers exert on their clients. So the courtesan comparison is an entertaining one on several levels. The French, not surprisingly, have a word for them. In fact, they have not just one word, but several phrases: poules de luxe 'luxury chicks' and grandes horizontales 'the great horizontal ones' are only two of the more entertaining. Putting aside the euphemisms, they are upmarket tarts. Not quite the way hedge fund managers would like to view themselves. But whether by accident or some form of inspired marketing, the courtesan word seems to convey more than this, just as hedge fund managers succeed in seeming more than mere speculators. Whether supporting military and political leaders, comforting kings and princes, spying by passing secrets acquired during pillow talk, or bringing scandal in their wake and toppling governments, courtesans have often played a pivotal role in history. Hedge funds have broken currencies, bankrupted economics, and threatened to destabilise the financial system.

They have been the stuff of news stories. Hotels have been built to honour their memory. The distinctive cupolas of the Carlton Hotel in Cannes - one of the premier hotels on the Cote d'Azur - were reportedly modelled on the statuesque Bella Otero, a leading horizontale at the time it was built. Hedge fund managers seek more subtle memorials.

Courtesans have been immortalised in books and opera. Alexandre Dum created La Dame aux Camelias. This was the story of Violetta Valery, a Parisian courtesan who succumbed to consumption. In turn the story became the subject of the opera La Traviata by Verdi. Operas have not been written about hedge fund managers, and what books there are have been a dry read. Then again there is Mata Hari, born Gertrude Margaret Zelle in Holland in 1876 who used her charms to spy for the Germans in World War I and was executed by the French for her pains in 1917. Hedge fund managers rarely fade away quietly either.

Or take the case of Veronica Franco, a Venetian courtesan who lived in the second half of the sixteenth century. Among her paramours was King Henry III of France. She had rich and powerful patrons, but she fell foul of those whose positions of patronage she threatened. Tried as a witch by the Inquisition, she was saved only because her many clients were shamed into pleading her case. There are parallels with hedge fund managers, not least with Long Term Capital Management (LTCM) and John Meriwether.

So they are the upper echelon of the world's oldest profession. What distinguishes them from their humbler sisters is that their clients are invariably drawn from the upper stratum of society, and wealthy to boot. Why make the comparison between courtesans and hedge fund managers?

They have plenty of apologists, many of which believe that the services they perform are a healthy outlet for basic instincts. Yet sometimes their clients get more excitement than they bargained for. They have, or claim to have, superior skills to their less well-known counterparts, for which they are paid very handsomely. They have achieved a certain level of notoriety. They are used by the wealthy and have a small and exclusive clientele.

For some at least, they provide an exciting alternative to more conventional relationships - with an air of risk and danger. Plenty of otherwise respectable institutions are happy to provide them with the support and services they need to practise their profession. Their actions have had adverse effects on the vulnerable. Those responsible for policing them sometimes turn a blind eye to their activities. They seek respectability, yet are never quite accepted as members of polite society, even by those who employ them. Sometimes they meet an unpleasant end.

We could have been writing here about the famous courtesans of history. Or writing about hedge fund managers. The parallels are strong.

Hedge funds and their managers have no shortage of apologists. Those who criticise what they do are often accused of not understanding the benefits they bring to the body of the financial system, of being overlay conservative or prejudiced. Or else the charge is one of being envious or embittered, or threatened by their success.

But the benefits they confer are hard to measure. Hedge fund managers enrich themselves through incentive fees and management charges, but whether or not they provide long-term benefits for their investors is another matter. Occasionally they go spectacularly wrong.

While many hedge funds have been successful, it is the less fortunate ones that attract attention. Often this attention, though uncomfortable, is wholly merited. The case of LTCM and John Meriwether is only the most highly publicised in a string of failures, which include Victor Niederhoffer's Niederhoffer Investments and David Askin's Askin Capital Management. More recently, other hedge funds have been laid low by fraud and deception, usually centering on the falsification of performance figures.

Not only this, and perhaps to the consternation of their customers, but the hedge fund style of trading is practised by large banks around the world, and has been responsible for some high-profile collapses or enforced takeovers. Quite apart from the obvious example of Barings, consider SBC's takeover of UBS. It was later found this had been completed after UBS discovered a large loss on its trading book. Bankers Trust was taken over by Deutsche Bank in similar circumstances. Most of Britain's big high-street banks have been through periods when they have made heavy...