Wednesday, July 29, 2009

Appetite for risk seems to have returned - but only, so to speak, for "simple risks" such as equities and bonds. There is a simple reason for the return of the risk appetite, when the fundamentals have not been sorted out: when people are paid to be "active", they HAVE to be "active" if they don't want to lose their jobs.

On the other hand, appetite for what might be called "complex risks" is yet to return (and a good thing, too?):

Chicago-based Hedge Fund Research claims to have found that hedge fund assets are still on their way down; in the final quarter of 2008 investors withdrew $152 billion while, in the 2nd quarter of 2009, withdrawals were at a lower level of $43 billion.

Though there was an increase in the value of hedge fund assets by $100 billion in the second quarter, this was entirely due to an improvement in investment performance (and that, as far as I can see, was itself due to the effects of all the stimulus packages around the world rather than any extraordinarily intelligent actions on the part of hedge fund managers - I am not implying that they were doing anything stupid, simply that they were doing, as far as can be worked out, what might be called "normally intelligent" things).

So "simple risks" may be accepted or declined with greater alacrity right now, but the appetite for "complex risks" is still declining

Professor Prabhu Guptara