Tonight:
4°c
The Financial Services Authority has just about got through the Northern Rock saga, only to face an even more challenging problem. It now has to decide whether or not to approve the takeover of Resolution Life, the insurance giant, and on what conditions. Whereas Northern Rock accounted for barely 5% of UK bank lending, there are five million policyholders within Resolution.
It is a horrible problem to have. Basically, the FSA's role is to make sure the new shareholders do not take advantage of the policyholders, and its mechanism for doing this is to insist on a certain amount of capital being left in the business to provide back-up for the investment policies. Part of bidder Pearl's thesis is that it uses modern investment techniques that require less capital.
Whether or not the FSA accepts this matters because the greater the amount of capital required, the lower the return to shareholders. If it is too tough, the FSA can render the takeover uneconomic.
Negotiations would have been robust at the best of times, but things are further complicated now by the fear that recent market volatility may have cost Resolution a pile of money. Its management has said there are no problems, but the FSA wants this confirmed by detailed current information from the bowels of the company. Unfortunately, the market moves rather faster than Resolution's systems, so producing sound data has proved challenging.
If the FSA is too lenient, there is a risk the policyholders will get a lousy return on their money and the FSA will again be dragged up before the Parliamentary beak. But if it is too strict, it risks making the deal uneconomic, in which case Pearl could walk away from it. That would leave Resolution independent but in a right old mess because much of its top management has already left.
Hence the FSA's dilemma. Having spent much of last year caught between a Rock and a hard place, it now has a problem that defies resolution.
Hedging bets at the bookies
RETURNS from conventional investments have been so boring for so long that the public is likely to respond enthusiastically to new rules, soon to be put in place, that will allow hedge funds to be marketed direct to UK retail investors.
The Financial Services Authority seems to be in favour - or at least has run out of reasons to oppose. The UK tax authorities are also apparently prepared to make the tax regime more even-handed from the investor's perspective between hedge funds and traditional UK unit trusts and open-ended investment companies (Oeics).
People should be free to make their own mistakes. But one feels that the public is again being allowed in just as the best of the fruit has been picked and the early birds are heading for the exit. Hedge-fund strategies have taken a bashing recently. Those who borrow short to invest long have found, as Northern Rock did, that it can be inflexible.
Those who put their faith in black boxes have discovered computers are not always good at telling the difference between the improbable and the impossible - although to an investor managing risk, the difference is fundamental.
Which hedge-fund strategy an investor is tempted by rests on two basic propositions. One is that there are, somewhere out there, easily identifiable people of superior intelligence with the ability to make superior investment returns in a variety of ways that are unconventional, if not always transparent. The second is that these people are willing to deploy their talents for your benefit.
Those tempted by the prospect might prepare by having a dry run down at the local betting shop. Simply walk in clutching a bulging wallet and ask if any of the assembled punters will bet your money for you in return for them keeping "only" 20% of the profits.
Reassure them that you will absorb all the losses from their bets without complaint, and without demanding that they rebate you any earlier profits, and there will be many volunteers.
If you successfully find one with superior intelligence who does indeed deliver winners month in and month out, then you are ready for hedge funds.
