Wednesday, 17 December 2008

What's in a Name?

This week’s big financial news story is the Bernard Madoff $50bn fraud. However it wasn’t till I heard the pronunciation of his name on the news that I began to take a deeper interest.

Madoff is pronounced “made off”. Why, I pondered, would anyone entrust large sums of money to a man whose own name warns you what he might do with it? I raised this with contacts in the investment world. One source, whose name is reminiscent of a hot milky drink, said “I suppose if his name had been pronounced “mad off” we might have thought twice about it.” So, even if your name was something like Robert Baron this would not be an impediment to starting an investment business, just so long as you are not actually perceived to be insane. That set me thinking some more.

In the UK the Financial Services Authority, known as the FSA is supposed to regulate and monitor our financial services industry to protect investors’ interests from the likes of Bernard Madoff. If you alter the word order to Services Financial Authority they become the SFA, a more accurate reflection of their competence and effectiveness to date. However this is described as “light touch” regulation and is deemed to be a good thing.

Then yesterday evening someone asked me a good question. What exactly is a hedge fund? I don’t know the answer. Does anyone? When I first heard the expression I light heartedly remarked why would anyone want to invest in hedges, but was told by people who know about these things that hedge funds don’t invest in hedges, they invest in “other things”.

Suddenly it all came together, a name that means what it says, a track record to date of unimpeachable sanity, “light touch” regulation and a proven money making technique. My idea for a new innovative investment vehicle was born. I will start a hedge fund that actually invests in hedges.

Why would this be an attractive proposition? Answer, bio fuels and biomass for power stations, two sure fire growth opportunities. I have been driving around the country and there are thousands of miles of hedges just standing there, sticking up out of the ground and no use to anyone, apart from a few wildlife, who would soon adapt anyway.

I would not of course get involved in actually selling hedges on to bio fuel producers and power generators, too much like real work. We would create a market in hedge futures and trade in Collaterised Hedge Derivatives. Above average returns to investors would be delivered from a combination of selling on these high yield financial instruments (all “financial instruments” are apparently high yield by definition) and money from new investors coming into the fund. I don’t see why all Bernard’s hard work perfecting this latter technique should go to waste and as I said there are miles and miles of hedges, not just in the UK either. The difference would be that we would still have the assets in the form of the hedges, so that should satisfy the SFA.

So watch out for the launch of Hawthorn Investments and get in on the ground floor, or perhaps into the ditch is a more appropriate expression.

Seriously though …. Sloppy and deliberately opaque and misleading language, designed to tell people what they want to hear rather than what they need to know, has become endemic in the business world and in the financial sector in particular. Governments and regulators have conspired in this also. If someone in authority had stood up and said very clearly that prime loans are loans to people that can repay whilst subprime are loans to people who cannot, would we be in the mess we are in now?

Having a laugh ..... seriously? is brought to you by Steve Goodman & Tony Ericson of ChangeWORLD. For even more serious information and comment go to our Exceeding Expectations blog and the ChangeWORLD website

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