Hedge funds become the new dot.com goldrush

Corbett's support; Huntingdon Life; Reed Elsevier

Hedge funds are the latest big investment craze. For years the exclusive province of the super-rich, they are multiplying like rabbits and in a world where traditional equity investment is struggling to make any kind of return, seemingly everyone wants a part of them. Strongly reminiscent of the dot.com goldrush, the craze seems certain to end in tears for many of the new round of money hungry investors flocking into the genre.

The California Public Employees' Retirement System is setting aside an astonishing $5bn to sink into hedge funds, and it is not alone. Normally staid pension fund trustees are falling over each other to invest in all the hottest hedge fund managers, and some not so hot or largely unproven too.

The traditional entry fee for a hedge fund is a minimum £100,000, making them closed to all but the richest and best connected of retail investors. But fear not. A number of retail funds are being launched to aggregate smaller sums into the larger amounts that will allow access. These funds of funds promise to seek out and develop new managers, as well as invest in some established ones. Their emergence almost certainly marks the high water mark of the hedge fund phenomenon. For the time being, however, it thrives as never before. Far from being killed off by the collapse of Long Term Capital Management, it has mushroomed. Average annual returns of 30-40 per cent, even through the technology meltdown of the past year and a bit, tell you why.

Like all investment crazes, however, you can always have too much of a good thing. George Soros's Quantum Fund eventually became so successful and big that it couldn't make money any more. The problem increasingly is of too much money chasing the same arbitrage and hedging opportunities, which naturally means that the amount of money that can be made out of them is much reduced.

As with LTCM, this in turn increases the amount of "leverage" that has to be applied to generate the required return. Add to that the fact that most hedge funds are offshore and don't obey accepted rules on asset allocation between manager and investor, and you have all the makings of serious grief at some stage down the line. For now, however, there's never been a better time to be a hedge fund manager.

Corbett's support

The save Gerald Corbett campaign is attracting some impressive supporters, and if he is eventually forced to walk the plank at Woolies, then the fallout it going to be considerable. The two hard-nuts are Jonathan Fry, formerly of Burmah Castrol, and Prue Leith, the celebrity cook. Both have said they won't take up their positions as non executives at Woolies if Gerald goes. Also in the Corbett camp is Sir John Banham, the Kingfisher chairman, who has publicly backed the former Railtrack boss with fulsome praise. Sir John has already said he's off later this year.

Sir Geoff Mulcahy, Kingfisher's chief executive, emerges with little credit. Having dithered for nine months over whether to demerge or sell Woolworths and Superdrug he then recruited Mr Corbett in the certain knowledge that it would court controversy. Now he looks like he doesn't have the courage of his convictions and is prepared to stick in the knife when it suits.

The emotional energy consumed by this ongoing farce is mindboggling. Sir Geoff's supporters claim that his tortured "analysis paralysis" approach to management pays off because he makes the right decisions in the end. That may be so but at what cost both to his own reputation and that of Kingfisher? If the executive team spent half as much time running the business as they do plotting, Kingfisher shares might be a good deal higher than they are.

Huntingdon Life

Huntingdon Life Sciences is these days such a cause célèbre that it regularly generates more column inches than even the mighty GlaxoSmithKline, which is also targeted by animal rights activists but is too big for them to make much of a dent in. The latest news - that the Bank of England has been forced to provide the animal testing group with basic current account facilities because nobody else would - illustrates better than anything what a pathetically cowardly lot our bankers and financial institutions have become.

As it happens, the protesters don't have any problem with the provision of bank payment facilities as such, or that's what their political wing, Stop Huntingdon Animal Cruelty (Shac) says anyway. It is only loans, overdafts and other forms of finance that they object to, an indignant Shac said yesterday. This is not a distinction that the financial markets would make, and it's an odd one for Shac to admit to also given that its raison d'être is to close down Huntingdon.

Everyone else is being targeted, including most recently Morgan Stanley and JP Morgan, whose only crime is to administer nominee accounts that provide Huntingdon investors with a degree of anonymity. But if the protesters are as good as their word, Sir Edward George, Governor of the Bank of England, can expect a protest free garden gate.

Even so, NatWest and others refused to do it, so the Government has rightly required the Bank of England to be banker of last resort. There are two points of principle that are being defended here. One is that important medical research should not be jeopardised by terrorist activity. The other is the precedent it would set if the campaign of harassment and violence succeeded. It would be the thin end of the wedge and allow extremists to believe they could achieve the same in any number of other cases.

But the real shame of it is that the Government has been forced to step into the breach at all. Already ministers have probably moved as far as they can in trying to correct the problem without infringing civil rights. The law on harassment and hate mail has been tightened and police have been given powers to instruct protesters in a way that forces compliance. The law on animal testing has also been strengthened and made more restrictive so as to bring it in line with public sensitivities.

Governments can always do more, but in the end the private sector must play its part too. If Huntingdon is so essential to the commercial interests of Britain's pharmaceuticals industry, why doesn't it do something about it by taking the company over. Huntingdon's financial needs are a drop in the ocean to the likes of GSK and AstraZeneca. But the greatest criticisms must be reserved for our whimpish bankers, who apparently won't support small companies carrying on a legal business when the chips are down and the moment demands it.

Reed Elsevier

When is the Government going to adjudicate on Reed Elsevier's acquisition of Harcourt in the US, which has been investigated by the Competition Commission because of a UK overlap in scientific, technical and medical journals? The Government promises to deal with Competition Commission reports within 20 working days of receiving them. This one has been with ministers for six weeks. If ministers are serious about giving the competition authorities independence, what's the problem? Why not just publish the CC's findings and be damned with it? The DTI seems as determined to pore all over the Commission's work as ever.

j.warner@independent.co.uk