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👀 I want to turn the UK into a hedge fund

Here's why.

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Fink Money
August 01, 2024 • Estimated Reading Time: 7 minutes

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We sometimes have insane ideas at Fink that might sound bizarre but actually have big elements of truth and are right (we are always right, didn’t you know that?).

This is another perfect example.

When I say I want to turn the UK into a hedge fund, I mean it.

You’ll remember we mentioned the requirement for more markets people in our Monday note about Rachel Reeves and how clueless the Treasury is…

And this is one way of going about it.

And it’s not that crazy a view.

The way I’d see it, we’d effectively be replicating exactly what the Swiss National Bank does.

Here’s a brief summary of what they do here…

  • Money creation: The SNB, like other central banks, has the ability to create money electronically. This process doesn't involve physically printing banknotes, but rather increasing the money supply through digital means. The SNB can create Swiss francs at will, effectively expanding its balance sheet.

  • Foreign currency purchases: The primary goal of this money creation is to buy foreign currencies, particularly euros and U.S. dollars. This is done to prevent the Swiss franc from appreciating too much against these currencies. Switzerland, being a small open economy with a large export sector, is particularly sensitive to exchange rate fluctuations. A strong franc can make Swiss exports less competitive internationally.

  • Investment in U.S. stocks: Unlike many central banks that primarily invest in government bonds, the SNB takes the unusual step of investing a significant portion of its foreign currency reserves in equities, particularly U.S. stocks. As of 2023, the SNB held over $100 billion in U.S. equities, making it one of the largest foreign investors in the U.S. stock market.

  • Portfolio management: The SNB's equity portfolio is highly diversified. It tends to mirror major U.S. stock indices, with investments in hundreds of companies across various sectors. The bank focuses on large-cap stocks and typically avoids taking large positions in individual companies to minimize market impact. However, due to the sheer size of its investments, the SNB has become a major shareholder in many U.S. corporations.

But something key happened a few years ago…

The Swiss National Bank was in such a position where they could actually spend their profits in the economy by returning cash to the ‘Cantons’ (their version of states/counties).

And what solution rhymes well with the UK’s current problem of the apparent black hole (there isn’t a black hole — it’s entirely made up)?

Well, this bit…

The SNB’s revenue must, by law, be allocated to provisions for currency reserves and then a distribution reserve. Any excess can then be transferred as profits to the cantonal and federal governments. The SNB’s return to profitability should therefore strengthen Switzerland’s overall fiscal balance.

Of course, we are likely too risk averse and too thick to actually conduct this kind of forward thinking activity, and many in the nation will look at the size of the SNB’s balance sheet/govt debt:GDP and say ‘woah there, we need more austerity.’

If we look at the profit returned though, it really isn’t that bad for a nation of Switzerland’s size…

If you’re able to return 6bn CHF per year (albeit an anomaly because of how hard US markets rallied relative to FX), at only 3% of the entire revenue…

Why wouldn’t you perform this revenue extraction?

Of course, it could be deemed eventually that Switzerland is a currency manipulator and the US Treasury has indeed hinted at them and Japan being so…

But if we want to take back some benefit from US supremacy, this is the way to go.

We cannot let them monopolise everything (albeit deserved).

They are effectively brute forcing financial markets due to the dollar’s role in the world, AND also their sheer expertise, cultural attitude to risk and permission to grow.

But even if we get down to the micro level, which companies control the passive bid in the market?

BlackRock with iShares and Vanguard with all of their funds.

And this carries through to foreign denominated ETFs too…

If you buy the iShares DAX ETF (DE), the end beneficiary is a US company.

I am not really one for the whole BlackRock conspiracy stuff, but there has to be something to it when Larry Fink’s Blackrock was in charge of corporate bond dealing for the Federal Reserve and the company’s shareholding in almost every major company globally as the ETF issuer!

Yes, they do indeed tell us when they vote on key decisions, but it’s not the point.

There is a hell of a lot of influence there.

So maybe the UK taking a chunk out of Blackrock’s book as a sort of sovereign wealth manager is the way to run this then!

A bit of biting back perhaps?

It would be a fantastic route for financialisation to actually do some good.

See, the cash would effectively have come from productive means — you’re providing cash to the economy not via printing directly but via profits.

This could be recorded as a government/treasury activity as opposed to just monetising debt.

The fact there is risk to reward in doing this is what makes it a productive activity, or at least far less inflationary than simply printing and handing it out like over the pandemic.

FX reserves are still having to be managed — why not manage them in a way which generates a profit in the end?

Of course, this is far too scary for the adults in charge to organise and we would be absolutely drilled to pieces by the electorate.

But at the end of the day, this is why you read Fink.

To think differently and to break away from that usual boring mould of things not being possible.

We CAN do this.

We CAN change things.

We just need a little imagination and to tell people to shut up when they say we can’t!

PS. all our stocks are green from when we started the momentum model.

Pretty good going.