The Guardian’s Financial Coverage is Basically Yellow Journalism

The Guardian, quite unsurprisingly, has written a vicious attack of hedge funds for their greed and rapacious wealth. Titled “Hedge funds ‘raking in billions’ during coronavirus crisis”, the article is designed to inspire the kind of apoplectic rage that one is used to seeing from articles in the Sun targeting welfare mooches.

And the Guardian’s effort is just as yellow journalism, misinformed, ignorant, and disingenuous as anything Murdoch’s rags would have ever dreamed of printing.

Simply put, it is a fantastic exemplar of left-wing media leveraging envy and financial illiteracy amongst their readership to stoke rage. First, the Guardian writes:

“Frances O’Grady, general secretary of the TUC trade union body, launched a stinging attack on hedge fund managers on Thursday after it was revealed one London hedge fund had made £2.4bn betting on market moves as investors panicked over a global economic shutdown.”

That £2.4 billion is quite small–one fund earned nearly as much of that betting against the market in America alone (the fund is a former client of mine). It did so by buying put options–essentially a derivative that goes up as the market goes down–which it did to hedge its core portfolio of stocks. This is what hedge funds do–they hedge their stock positions by betting against the stock market. That is their raison d’etre.

Is this bad? Should the market not allow investors to profit from the market going down? This argument is made often by polemicists who don’t understand finance. Short selling and betting against the market has been made illegal in the past, and, to quote the Financial Times, “endless” studies on this topic have shown banning short selling doesn’t actually help stocks go up. On the contrary, doing so in bullish periods can actually make the market go into a bubble. Source: https://ftalphaville.ft.com/2020/03/18/1584523654000/Against-the-short-selling-ban/

In short, hedge funds making billions of dollars when markets go down are providing a valuable social function by spreading risk and ensuring better price discovery within capital markets. This has been amply proven by decades of research.

But that is not the limit of hedge funds’ social value. A primary role hedge funds have is in servicing the cash flow requirements of pension funds; without hedge funds, many pensioners’ income would be at risk. Is the Guardian opposed to retired firefighters, police officers, and teachers living their golden years in financial stability?

The hedge fund that the Guardian attacks, Odey Asset Management, is a prime example of this. The fund focused on “steadily building our pension fund client base”, according to the fund’s then CEO, David Stewart, in 2018. Another fund attacked in the Guardian, Ruffer Investments, also markets itself to pension funds as a service provider.

This will surprise no one in the financial industry; pensions depend on hedge funds as one of their alternative investment options.

There is more fuzziness and misdirection in the Guardian piece; its comment that Odey Asset Management earned a £2.4 billion profit from its bearish position is followed by the statement: “News of the multibillion-pound windfall came as Crispin Odey, the Brexit supporter who made millions betting against the pound in the run up to the EU referendum, said his fund had made its biggest monthly gain since the financial crisis.” Less astute readers (of which there are many, even if Guardian readers would never admit to being one) could easily conflate the hedge fund, with its multiple external clients and dozens of employees, with Crispin Odey himself, and supposedly the absolutely irrelevant detail of his Brexit view was added to further incense ire against the anti-Brexit Guardian readership.

There is other dishonest rhetoric in the piece. When the article’s writers note that Ruffer Investments used “cheap ‘protective investment’ bets on market volatility”, the pejorative of “cheap” here will surely ring with the Guardian’s hatred for financiers. However, the cheapness of these bets really referred to the low price on volatility-tracking derivatives, whose premia were at historic lows before the covid-19 crisis began–a mathematical inevitability for anyone familiar with the Black-Scholes pricing model.

The Guardian is very right to critique climate-change deniers, as it often does. It is right to attack those who distort the truth to their own political ends. However, the Guardian is very much wrong to engage in its own numerical illiteracy and rhetorical games to attack hedge funds who are simply doing what they are built to do–win at a zero-sum game in the marketplace–whilst some of the marginal benefits from that game flow to pension funds.

This is not to say hedge funds are paragons of virtue and moral innocents–anything but!–but a well-informed and intellectually honest critique of the industry would be far more impressive than the misguided and disingenuous claptrap the paper has chosen to publish instead.