Home' Trinidad and Tobago Guardian : August 8th 2013 Contents AUGUST 2013 • WEEK TWO www.guardian.co.tt BUSINESS GUARDIAN
THE ECONOMIST | BG27
Four-letter words are no rarity on trading floors. Few are
likely to cause greater alarm nowadays, though, than ''edge,''
the term for one investor's nebulous advantage over others.
In America authorities seem to have concluded that ''edge''
is little more than a euphemism for insider trading.
On July 25 a slew of American federal agencies filed a criminal
case against SAC Capital, a hedge-fund behemoth they long
have suspected of profiting from questionable information.
The now-dirty word features 14 times in their indictment.
Hedge funds dealing in equities have long promised "edge"
to justify their exorbitant fees. Few had more of it than SAC,
which, perhaps not coincidentally, also charged the highest
fees -- as much as half the profits it generated for investors.
Even then it was among the most successful of its peers, which
together invest around US$1 trillion in stock markets.
The authorities claim that SAC's advantage was ill-gotten.
A handful of existing and former SAC staff already have been
convicted of or pleaded guilty to insider trading. The July 25
indictment offers plenty of color around its alleged transgres-
sions: SAC apparently hired one trader partly because he
shared a Hamptons vacation home with the finance chief of
a listed company. The implication presumably is that SAC
thought him likely to share upcoming quarterly results over
cocktails. Seized e-mails allege illicit encounters with company
insiders and subsequent trades based on those encounters.
Steven Cohen, SAC's founder and the man whose initials
it borrowed for its name, faces no personal criminal charges,
though recently filed civil charges---which he denies---could
see him barred from trading. SAC itself has pled not guilty
and pledged to keep on operating as before.
None of the Wall Street banks it needs to carry out its trades
so far has publicly repudiated the fund. Most outside investors
are reportedly in the process of pulling their money, however,
downsizing SAC to its founder's US$9 billion fortune.
SAC's troubles are also rippling through the wider industry.
Investors are nervous about being connected to anything that
could attract watchdogs' wrath. Institutions such as pension
funds, which now provide most of hedge funds' outside money,
are particularly anxious. They want to see energetic in-house
compliance teams who can demonstrate that they are weeding
out bad behaviour.
"If you haven't fired someone for insider trading," says a
marketing boss at a large fund, "investors will ask you why
Any use of"'expert networks," firms which set up meetings
between hedgies and staff working at companies, are frowned
upon, if not banned outright.
Policing ambitious, bonus-fueled traders can be tough, how-
"It's hard to tell staff that they need to find all the information
they possibly can about a company," one compliance chief
says, "but never come across anything that could be categorized
as inside information."
Cynics also point out that some equity hedge funds have
delivered ho-hum profits ever since authorities have clamped
down on insider trading. In fact, in the calendar years since
2008, they either have lost money or have failed to beat the
If having an "edge" attracts unwelcome attention, not having
one is not much better.
@2013 Economist Newspaper Ltd. (Distributed by the New York
The cosmopolitan Netherlands once stood at the
heart of the cause of European integration. The
country was among the founding members of
the European Union and of the Schengen open-
border treaty. With its economy looking to Ger-
many, its cultural aspirations to France and its political liberalism
to Britain, and with an educated class that spoke all three of
those countries' languages as a matter of course, the Dutch
saw themselves as the ideal mediators in the European proj-
ect.Those days are gone. In July Geert Wilders, a far-right politi-
cian known for calling on the Netherlands to ban the Koran
and exit the euro, wrote them a piquant epitaph: Wilders
announced that he would hold talks with right-wing parties
in other countries about forming an anti-Europe bloc in the
European Parliament elections this autumn.
He has since spoken with Marine Le Pen's National Front
in France, a party similar to Wilders' Freedom Party in many
ways, and with the Lega Nord in Italy. Having shattered the
multicultural Netherlands, which once brokered the integration
of Europe, Wilders is now proposing to undertake Europe's
In the past two years Wilders' party has taken advantage
of rising Dutch anger over the euro crisis by shifting the focus
of its criticism from Islam to the EU. That strategy failed in
elections last autumn, when the Freedom Party lost seats, but
it seems to be paying off now.
Dutch Euroskepticism is reaching unheard-of heights: A
Gallup survey in early June found voters split evenly, 39 per
cent each, on whether to exit the EU entirely. Most recent
political polls put the Freedom Party in a close fight for the
second-largest share of the vote, and one poll has it in the
lead. The other strongly Euroskeptic party, the far-left Socialists,
is doing nearly as well.
This spells trouble for the government, a coalition between
the centre-right Liberals and centre-left Labour, for whom
leaving the EU is not an option. Prime Minister Mark Rutte,
a Liberal and a polished salesman, has been pitching voters
a mixed message: On the one hand the EU is the key to solving
the economic crisis. On the other hand the EU's excesses must
In Germany in June Rutte echoed the aphorism of Chancellor
Angela Merkel that Europe's economies are "all in the same
boat." At the same time, however, Foreign Minister Frans Tim-
mermans was unveiling a list of 54 policy areas that the Nether-
lands believes should stay in national hands rather than be
handed to the EU, and declaring that the time of an ever-
closer union in all policy areas is past.
Anti-European feeling in the Netherlands is rooted in the
deteriorating economy. The country weathered the first years
of the euro crisis relatively unscathed, maintaining its AAA
credit rating and a 4.5-per cent unemployment rate, the lowest
in Europe. With their privileged economic position, the Dutch
blamed profligate southern Europeans for demanding support
from the north. In 2011 they led the AAA countries---along
with Austria, Finland and Germany---that demanded that
Europe harden its three per cent budget-deficit limit as part
of the price for that support. Rutte still claims the strong
enforcement powers granted to Olli Rehn, the EU's budget
commissioner, as a personal achievement.
As deficit-cutting progressed across Europe, however, the
Dutch economy turned south. It now has been in recession
for six quarters, with output 1.8 per cent lower in May compared
with a year earlier and unemployment rising to 6.8 per cent.
Every economic projection has proved too optimistic.
As revenues shrank, the Dutch missed the 3-percent deficit
target they had themselves helped establish. Humiliating visits
from Rehn, demanding ever-greater austerity, have lent weight
to Wilders' charges that the government is slashing spending
and raising taxes merely to satisfy Brussels.
During his latest visit, in June, Rehn demanded that the
Netherlands push through an additional US$8 billion in austerity
measures in 2014, on top of those already planned. Rutte will
have to pass a revised budget in September, though it is not
clear whether he can. The Liberal-Labour coalition has a com-
fortable majority in the lower house of parliament, but it is
in the minority in the Senate, a sleepy constitutional body
whose technical power to block the budget the opposition
now has decided to use.
Worse, Rehn's demand has blown up a "social accord"
reached in April, in which the government, labour unions and
business groups all signed on to a budget deal along with a
set of labor-market reforms. The accord was a classic example
of the old Dutch "polder model" of collective decision-making
by different social stakeholders, and was intended to create
support for the budget that would induce minority parties to
vote for it. The unions have now withdrawn from the deal,
though. More remarkably, the powerful head of the country's
main business lobby also has come out against the cuts, rec-
ommending that the government demand to be granted an
Should Rutte manage to push through the cuts, it could
improve Wilders' chances in the European elections. Tim-
mermans, one of the most pro-European voices in the cabinet,
wants to turn the debate away from whether voters like or
dislike the EU toward the role the EU ought to be playing.
With public resentment running high, though, that sort of
subtlety probably will be lost.
@2013 Economist Newspaper Ltd. (Distributed by the New York
An EU founder gets the jitters
Hedge funds after SAC:
Hedge on the edge
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