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There’s an interesting article in today’s Financial Times concerning the massive profits being generated by hedge funds.  According to research cited by the FT the top 10 hedge funds made $28bn for their clients in the second half of 2010.  This is contrasted with the $26bn generated by the world’s leading banks.  The article is interesting for a number of reasons.  It suggests that one of the reasons for such very high profit margins stems from the relatively small numbers of employees needed by the hedge funds to produce huge revenues.  The banks, by contrast, employ millions of people because they need to maintain complex branch and online networks to allow us to give them all our money.  As the entire busines of a hedge fund is based on large-scale betting on the world’s markets, they are able to play at a very rarified level without needing to trouble themselves with the constraints money imposes on the rest of us. 

As suggested in the previous post, this further widens the yawning gap between the kinds of monetary and value structures that everyday citizens encounter and those available to the super-rich (corporations and/or individuals).  No surprises there, perhaps.  What was more surprising (to me at least) is the degree to which these profits have been secured by a retreat into various forms of bullion. 

One of the elements of the Federal Reserve’s ‘quantitative easing’ programme (basically creating money to increase liquidity in the US economy) was that certain large-scale investments could be denominated in gold.   Because the gold price is relatively stable in the long term, the increased volatility of world currency markets has seen a significant rise in the use of gold and other precious metal-backed securities – particularly so-called exchange-traded funds (EFTs).  Although they have been around for a while, metal-backed EFTs are increasingly popular among investors looking to protect themselves from shifts in national currencies.  As ‘quantitative easing’ risks devaluing the $US (in other words, by increasing availability (quantity) over scarcity (quality – in monetary terms)), the Fed has given the large-scale investors (i.e. those that did most to cause the banking crisis in the first place) a route out of the risks associated with currency trades.  Some of the largest hedge funds, including the second biggest of them all, Paulson & Co., have the majority of their working capital (and all of Mr Paulson’s personal investments, apparently) securely invested in huge stockpiles of metal (gold, silver, palladium, platinum. etc.). 

Whilst they are emblematic of much that has gone so spectacularly wrong with contemporary ephemeral, valueless electronic money and the systems through which it is traded, the hedge funds themselves are retreating into money’s oldest and apparently most enduring form of value storage.  And should you be tempted to follow their lead…..you can’t.  EFTs are only available to certain categories of big institutional investor.