Why Greece needs more Hugh Hendrys

Debating with Hugh Hendry earlier this week on Newsnight, European Socialist Party president Poul Nyrup Rasmussen implied Greece needed hedge funds like a hole in the head.

Prime minister George Papandreou would probably have said as much had he been arguing with the veteran hedge fund manager instead.

But Greece needs hedge funds for at least three key reasons.

First, leaders of countries, like those of companies, need people to tell them when something is wrong with their management.

Hendry, founder of Eclectica Asset Management, dubbed himself a canary in a coal mine for Greece.

David Harding, founder of rival Winton Capital Management, has said hedge funds are important because they inject badly-needed skepticism into over-hyped markets.

Ian Morley, founding chairman of the Alternative Investment Management Association is fond of saying, when corporate leaders are surrounded by yes-men, hedge funds are the only people who will say ‘no’.

Funds may not tell leaders exactly what is wrong, but if they are at your gates, you had better check the foundations of your citadel.

Hedge funds were warning Greece for over a year its creditworthiness was slipping, a warning Greece opted to ignore.

Second, hedge funds provide markets, including for Greek bonds, badly-needed liquidity in times of stress.

When markets seize up, it is short selling by hedge funds that continues to feed instruments into them. The prices may fall - due to heavy selling, hardly due to vilified short selling - but having no market for an issue is significantly more damaging in the long run to an issuer’s reputation than having a falling-but-functioning one.

Third, the argument of hedge funds as liquidity providers also applies to markets in distressed bonds, which most mainstream sellers vacate when trouble strikes.

Rasmussen was wrong to say hedge funds are inflicting pain on innocent Greeks – it is the EU, Angela Merkel and Nicolas Sarkozy who will do that to bring Greece back into line.

Until it repairs itself, Greece will have to pay over the odds to borrow money, and some doors to sell its issues will remain shut – but that is creditworthiness for you.

Hendry was right to say he could not “dictate the economic affairs in a country such as Greece, I can merely reflect on either their success or failure.”

Blame has been laid at hedge funds’ feet in the past. They buy instruments that pay out if entities default, and so push for such events, dictating affairs as minority holders to realise this goal.

Hedge funds can indeed make life very difficult for companies whose bonds they own, opposing other bond holders’ restructuring plans, for example.

But it is hard to see how they could hold an entire country over a barrel. At $1.5 trn as an entire industry, they simply do not have the clout.

Towards the end of the interview, it did little credit to Hendry when he attacked Rasmussen as a “champagne Socialist”, but it was also wrong of Rasmussen to counter with, “I say to Mr Hendry, you can say farewell because you never learn”.

However, while Newsnight interviewed him, Hendry took a call for a subscription of between $1.5m and $2m for an Eclectica fund. Clearly, not everyone dislikes what he is doing.