Hedge fund revolt

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London is turning against the $450bn hedge fund industry that helped make the city a contender for the title of world financial capital.

As Lehman Brothers Holdings Inc filed for bankruptcy and HBOS Plc was pushed into a government-brokered takeover, UK regulators and lawmakers found a culprit: the estimated 980 hedge funds that reside in Britain, mostly in London. Harbinger Capital Partners Fund chief Philip Falcone was singled out by the Daily Mirror.

The tabloid used a front-page story on Sept18 to brand him a "greedy pig" for short selling, or making bets that Edinburgh-based HBOS would lose market value.

Britain's Financial Services Authority moved first among the world's regulators to ban short selling, after bank stocks plunged and New York-based Lehman, the fourth-biggest US securities firm, collapsed. As funds adjust to the loss of their principal hedging strategy, they are also struggling to extract assets from Lehman and now face a political backlash.

Lawmakers, including Ed Balls, prime minister Gordon Brown's main cabinet ally, are pushing for tougher oversight.

"People are upset at the swift change of sentiment," said Jacob Schmidt, CEO of London-based hedge fund adviser Schmidt Research Partners. "It threatens London as a marketplace. The demonisation of hedge funds isn't healthy and more and more will think of going elsewhere."

Some in the financial industry say stricter oversight is inevitable, as authorities try to protect banks from speculators. HBOS, the UK's largest mortgage lender, fell 33 percent in three days last week, before it agreed to be bought by Lloyds TSB Group Plc in a deal encouraged by the government.

"There were certainly excesses," said Max Gottschalk, senior managing director at London's Gottex Funds Sarl, referring to the financial markets. "Regulators will want to ensure it doesn't happen again." Gottex oversees $15.6bn in funds of hedge funds. "Over time, the industry will be more regulated. Events of last week have changed the financial landscape forever."

Archbishop of York John Sentamu, the Church of England's second-ranking cleric, said HBOS short-sellers were "bank robbers" and "asset strippers." He made the remarks in a speech to London bankers yesterday, according to his Web site.

In an article to be published in the Spectator magazine, Archbishop of Canterbury Rowan Williams, the UK's top cleric in the church, invokes Karl Marx in attacking "unbridled capitalism," according to the BBC.

Harbinger, run from New York by the 46-year-old Falcone, manages about $26bn. "Falcone hasn't spoken negatively about HBOS, and Harbinger has never intended to hurt the bank, its shareholders, or its employees," spokesman Charles V Zehren said. "Like all hedge funds, Harbinger has taken long positions and short positions in all manner of companies as part of our investing strategies. The failure of HBOS was based on its inability to manage itself properly."

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