Giving George Soros what he wants
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Giving George Soros what he wants

For all the talk of designing exotic derivatives for hedge funds, the most useful service a bank can provide is often good old-fashioned credit. Even so hedge funds are prompting banks to reorganize since their demands straddle many departments. The funds' importance as customers is starting to outstrip that of institutional investors, and the banks are dancing to their tune. Andy Webb reports.

As the latest batch of Asian governments have just demonstrated, hedge funds make convenient scapegoats. Perhaps Malaysia and Indonesia would have been better advised to restrict their reactions to rhetoric. Their attempts to artificially regulate their way out of a crisis did little, other than immeasurably improve the situation from the funds' perspective.

Since shooting to public prominence at the time of sterling's ignominious exit from the EU's exchange rate mechanism in September 1992, hedge funds are now trotted out at least once a year by some government or another as a convenient excuse for their own fiscal shortcomings. However, the publicity misses the point. Hedge funds are here to stay and have become an integral part of the financial markets. Nowhere has that been more the case than in derivatives where there is clear evidence to suggest that they are shaping events - and investment banks.

To service hedge-fund business as a whole, the investment banks offer two distinct types of service: prime brokerage and niche services. Prime brokerage consists of a number of services, ranging from mundane needs such as custody or performance reporting to buying/selling individual instruments, including OTC derivatives.

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