Loose Lips Sink Ships…and SWF Mandates

Ashby Monk

Reuters had quite the eye catching headline yesterday: “China state fund open to shorting stocks”. Even before reading the article, I immediately imagined a trading floor in CIC headquarters with some risk seeking traders looking to profit from the demise of foreign companies. Then, I pictured the diplomatic fallout from an official Chinese government agency shorting failing US and European firms (see Norway’s experience with Iceland). My mind was already racing with implications and analysis…and then I actually read the article.

As it turns out, the story isn’t as intriguing as I had hoped:

“China’s $300 billion sovereign wealth fund is looking at directly investing in funds that could benefit from falling equity prices.”

In other words, the CIC is looking to allocate some money to long-short hedge funds, which, in my view, is something any large, well-diversified portfolio investor should consider. We’re not talking about people within the CIC shorting stocks; we’re talking about private sector fund managers (who, in all likelihood, are based in the US or Europe). So my hastily constructed prediction of diplomatic fallout evaporated; China would not be shorting US manufacturing firms. But could you imagine that? It would have been a heck of a story.

Anyway, while the Reuters article wasn’t what I had hoped, it still managed to shock me in another way. Can someone explain to me what Fidelity (Pyramis) is doing talking to Reuters about what the CIC is “looking at” or “talking” about with them? In my experience with these funds, SWFs (and especially the CIC) are extremely sensitive about information control, which is why these types of discussions and negotiations are kept under wraps. By saying to the press that Fidelity is “in talks” with the CIC for a specific mandate, I expect that Fidelity has immediately removed itself from consideration for the mandate.

As if to confirm this, Reuters subsequently issued the following correction to the article:

“Corrects to delete first bullet point, which said that Pyramis and China were in talks. Fidelity says Chin misspoke in suggesting that Pyramis and China were talking directly about a long/short strategy.”

In other words, someone at the CIC shut this down. If you can’t be discreet during the negotiation phase, how can the CIC trust you to be discreet once you have their cash?

This reminds me of something my grandfather would say; he spent four years in the Canadian navy in WWII’s Pacific theater of operations: “Loose lips might sink ships.” Apparently, they can also sink SWF mandates…

1 Response to “Loose Lips Sink Ships…and SWF Mandates”

  1. 1 rien huizer March 17, 2010 at 12:37 am

    Leave it to the Koreans

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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