Credit where credit is due. The Economist reports that Canadian hedge fund Muddy Waters scored a spectacular success earlier this month after accusing Sino Forest, a Chinese timber company, of doctoring its accounts. Muddy Waters had shorted Sino Forest stock, which is listed on the Toronto Stock Exchange, and made a tidy profit as the price fell. Other hedge funds are keen to repeat the trick. But while Muddy Waters engaged in painstaking research, according to today’s Wall Street Journal, many other funds are hiring Hong-Kong-based firms to “fish” for dodgy Chinese firms.
There is no dictionary definition for a hedge fund, but generally an investor would expect the fund manager to be using his or her expertise and judgment to seek outsize returns. The fishing strategy outlined in the WSJ, on the other hand, seems to involve nothing more than exploiting economies of scale, and taking advantage of the regulatory flexibility afforded hedge funds.
There is certainly skill and expertise involved in such a strategy—researchers apparently include a former Interpol corporate crime investigator—but it's all in the hands of the Hong Kong firm. The hedge funds simply hire this expertise. Does that matter if the strategy reaps returns? I would say yes. Because the fund is not relying on proprietary information, what is to stop other people using it....
Find out more at http://www.economist.com/blogs/freeexchange/2011/06/hedge-funds-china
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