Interventions in financial markets’ shocks

The US congressional leaders’ agreement on an increased debt ceiling until 2013 and a reduction of $2.4 trillion spending over 10 years has retrieved the US bond market; however, the concerns about the ongoing US fiscal and economic challenges and the S&P’s downgraded US long-term credit rating from the AAA to AA+, as well as set a negative outlook for the US economy, has driven down the major stocks indexes and commodities’ prices sharply. The panic in the global financial markets has boosted the gold price above $1,700 per ounce and surged the Swiss franc to 1.350 against the US dollar, these being the prices of the assets considered as secure investment to preserve investors’ capital until the fundamentals of the investments are reassessed.

The last week was notable for governments’ and central banks' interventions. The US attempted to tackle the possible default on sovereign debts, announced the debt reduction plan and raised the debt ceiling. Italy initiated constitutional changes to strengthen the budget discipline and the ECB purchased Spain’s and Italy’s bonds to calm the rally of the sovereign bonds’ yields. The Swiss National Bank rushed to decrease the three-month LIBOR to 0,00-0,25% and announced the expansion of banks' deposits to CHF80 billion as well as their intentions to repurchase outstanding the SNB bills in order that the appreciated currency wasn’t threatening the Switzerland economy. The Bank of Japan sold up to Y4,000 billion due to the similar currency appreciation threats to domestic economy. The US Federal Reserve promised to keep unchanged low interest rates until 2013 to stop panic stocks sales. It seems that only the price of gold, - the alternative currency, may not be easily manipulated by government interventions. Consequently, private and institutional investors might be willing to increase their gold reserves to hedge assets from the depreciation.

Considering the alternative investments, the Pregin’s, a research and consultancy firm which focuses on alternative asset classes noted that hedge funds become more “mainstream” rather than “alternative” within institutional portfolios. According to the Pregin’s Hedge Fund Spotlight published in August 2011, the percentage structure of institutional investors in hedge funds are the following: 21% Funds of Hedge Funds, 15% Foundations, 15% Endowment Plans, 13% Public Pension Funds, 12% Private Pension Funds, 6% Asset Managers, 5% Family Offices, 4% Insurance Companies, 2% Banks, 1% Investment Companies, 1% Sovereign Wealth Funds and 5% Others. Analysis of banks investing in hedge funds reveals that 60% of European banks, 13% of North American banks, 10% of Asian banks and 17% from the rest of the world are investing in hedge funds. The most active five banks investing in hedge funds are the Royal Bank of Canada with $751.9 billion of AUM, Pictet & Cie with $302.3 billion of AUM, F. Van Lanschot Bankiers with $29 billion of AUM, Investec with $4 billion of AUM and Credit Mutuel de Maine-Anjou, Basse-Normandie with $0.2 billion of AUM.

So, do we need it that governments and central banks were focused on short term financial markets’ shocks when financial alternatives may be used to transfer risks in the financial markets?