The Hedge Funds Will Rise And Eat The Flesh Of The Banks

Posted on Oct 15, 2020. by NTI

We know that when you are dealing with millions, sometimes billions of pounds you are not about to have a swig of your vodka and Red Bull and say, "put it all on black", while stroking the feather on your cavalier hat. There are swarms of economists and accountants in the background clicking keys and triple checking, crawling over projected outcomes and being sensible. So how do you explain hedge fund Marshall Wace taking a 3 per cent stake in British Airways' owner IAG this week? This is on the same day that Europe's largest airline by aircraft, routes and twinkling Irish chutzpah, Ryanair, announced cuts of one-in-three winter flights (from November to March) with a warning of potential further job losses.

It could be something to do with the fact that IAG's shares have fallen 60 per cent to 98p since February and someone with eight degrees in macro-mathematics thinks it is worth a punt. They clearly think they know more than rival fund Lansdowne Partners, who took a big one on the chin earlier this year placing a bet on the airline industry when others were looking at a state-sized car-park full of flightless Boeings which ain't going anywhere soon.

No-one is taking a bet on the commercial property sector in the UK. New loans declined by 34 per cent to £15.5 billion in the first six months of this year, and more than a fifth of lenders said they didn't make a single commercial property loan in this period. Not even one. 

The value of commercial property is taking a sled-ride and landlords are seeing lease covenants broken, with rent not being paid and many a snook being cocked their way in the process. However, the banks' wariness to lend is creating opportunities for money managers to plug the gap with credit funds, like hyenas working on a corpse once the lions have moved away. (The NTI newsroom would like to apologise to hyenas who may find the comparison with money managers in the last sentence distatsteful.) 'Alternative lenders' have consistently taken market from mainstream lenders during a year when we see the smoke of 'new normal' floating off into the distance. This is known as 'non-bank lending', in the same way that take-aways are known as 'non-cooker eating'.

For example, Cheyne Capital hedge fund has just raised £500 million for two new credit funds, seeking to move in on the space the banks have left in their wake as they hurtle to safer pastures, accepting gratefully their 0.1% interest rates and cutting staff and premises to brighten their bottom lines. Billy says he is well-prepared for what he calls 'The Next Call' (his apostrophes and capitals). He and his fellow ... we are not actually sure what they are, but they play games a lot and speak to each other through headsets, wearing ear-defenders as a fashion item.

"The hedge funds are the zombies," he explains. "They will eat the flesh of the banks and grow strong."

"What happens next, Billy?" Aarati asked him.

"No-one has ever reached Level 45 - post-zombie, The Next Call." There was silence in the room, broken only by the thud of a small bird hitting the glass behind him. We waited. "Maybe no-one ever will ..."

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