ADN Abdn.Asset.Man.

By Laurence Fletcher 

Some of the world's top hedge-fund managers are worried. They say central bank bond buying programs that are pumping trillions of dollars into global markets will end badly.

The European Central Bank said Thursday it would extend its asset purchase program to the end of next year, buying bonds at a reduced rate. Prominent managers have told The Wall Street Journal in recent interviews of their doubts about the endgame for quantitative easing around the world.

"There's no non-messy way out of this," said Luke Ellis, chief executive of Man Group, one of the world's biggest hedge-fund firms with $80.7 billion in assets.

"There's two versions" of how this ends, added Mr. Ellis. Either central banks could move to so-called 'helicopter money,' where they buy debt from the government, which then spends the proceeds or gives it to the population to spend. This "for a few years looks golden then leads to hyperinflation," he said.

Or the speed at which money circulates within the economy could grind to a halt. "Then you effectively have a barter economy," he said.

In a series of exclusive interviews with the Journal, hedge-fund executives overseeing around $280 billion in total highlighted a range of problems created by quantitative easing. Often the problems they highlight are precisely those that QE was designed to solve.

Damage to economic growth

Rather than kick-starting growth, quantitative easing may do the reverse.

Some managers fear it distorts financial markets and undermines capitalism. That system relies on profit-hungry investors to differentiate between strong and weak companies--funding the strong while letting the weak die. QE, say some managers, doesn't differentiate.

For instance, the Bank of England is buying the debt of firms it deems make "a material contribution" to the U.K. economy. That has led some investment banks and companies to create new debt especially for it to buy. The ECB has bought EUR48.2 billion ($51.2 billion) of corporate debt since June, but the hoped-for private-sector investment hasn't materialized.

"What does a market do? It's a voting mechanism," said Michael Hintze, billionaire founder of hedge fund CQS, which runs around $12 billion in assets. "Instead you've got this 800-pound gorilla out there who's hoovering up assets.

"There's a misallocation of capital and an opportunity cost to the real economy," added Mr. Hintze, whose portfolio is up 30% this year, ranking it one of the world's top-performing hedge funds. "It means GDP is not growing as much as it might."

The Federal Reserve used QE in the wake of the financial crisis in an effort to avert a more severe recession and stimulate borrowing and investment. It stopped these purchases two years ago, although large programs in the Eurozone, U.K. and Japan mean QE is still a significant influence in global markets.

Its proponents, notably central bankers but also many in the financial world, have argued that it has achieved its aims and that GDP and employment would be lower without it.

But some are not convinced.

"It's definitely destructive of economic growth," said Crispin Odey, founder of Odey Asset Management, which runs $8.2 billion in assets.

"Capitalism dies a death," said Mr. Odey, who sees government policy as the main factor influencing markets. His fund, a top performer after the credit crisis, is down sharply this year because of being too bearish. "It's all policy. It's the Kremlin. And I'm in the gulags."

Damage to society

In her speech to the governing Conservative Party conference in October, U.K. Prime Minister Theresa May spoke of "some bad side effects" from quantitative easing as people with assets got richer while those without them suffered. U.S. President-elect Donald Trump has said low rates have robbed savers.

Those side effects include "envy and distress" within society, "as people think 'I can't get out of where I am,'" said Andrew McCaffery, group head of solutions at Aberdeen Asset Management, who looks after $170 billion in assets.

Ultralow interest rates mean the large part of the population with few financial assets begins to despair of how to generate income to fund retirement, he said.

"People see a developing black hole," he said. This "increases the sense of there being little to lose for many" people.

Andrew Law, chief executive of New York-based Caxton Associates LP, which runs around $7.8 billion, said quantitative easing averted economic depression after the financial crisis.

But he added: "The losers of QE are society, and democracy is also a loser, because central banks are not publicly elected officials."

Deflation

Quantitative easing was also introduced as a way of increasing private-sector spending and raising inflation. Some investors even worried it would spark hyperinflation and rushed to buy gold.

Instead, say some managers, it has led to deflation.

"It took me a long time to work it out," said CQS's Mr. Hintze. "It's a very complex issue." He said that massive amounts of liquidity mean that "liquidity's not worth much anymore," which leads to negative interest rates.

"I do think it [QE] is a massive deflationary force. The reason is because money is worth less but the price of real assets goes up."

Mr. Odey said quantitative easing leads to deflation because weaker competitors are kept alive by cheap debt as "zombie" companies.

Hard stop

Finally, hedge-fund managers see difficulty in ending quantitative easing.

"Central banks are sadly helping to create the 'black hole,' and the sucking noise and pull is getting bigger," said Aberdeen's Mr. McCaffery, "but you just have to keep going as your alternative options as a central banker are just too unpalatable to consider.

"More methadone is not going to help, a form of cold turkey [is] needed, but no central bank is going to do that," he added.

He warns governments' debt-to-GDP levels have risen. "In the long term, it implies rates can never go up, as the damage will be extraordinary in nature," he said, as they struggle with their debt loads.

Write to Laurence Fletcher at laurence.fletcher@wsj.com

(END) Dow Jones Newswires

December 09, 2016 11:30 ET (16:30 GMT)

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