At World’s End

What do Somali pirates have to do with hedge funds?


I don’t envy Barack Obama. Not only is he charged with steering the world’s largest economy out of what many are calling the worst financial crisis since the Great Depression, he now finds himself fighting pirates. In April, Obama became the first U.S. president since Thomas Jefferson to authorize an attack on pirates when he gave the green light to Navy Seal snipers to shoot three Somali brigands holding an American cargo ship captain hostage in an enclosed lifeboat off the coast of Africa.

The daring rescue displayed the nimbleness of America’s special forces, but it did nothing to mitigate the ongoing threat. Pirates have attacked 80 ships this year off the coast of Somalia and in the Gulf of Aden, capturing 19 and disrupting one of the world’s major waterways, through which more than 20,000 ships pass a year. Obama’s vow to halt piracy in the region seems only to have incited the ire of the Somali pirates, who attacked a U.S.-flagged vessel carrying 27,000 tons of food aid bound for Kenya, Somalia and Sudan just days after the rescue (fortunately, the pirates aborted the assault and the ship was able to continue on its mission).

Clearly, Obama and other world leaders are not dealing with the kind of buccaneers romanticized by Disney in its Pirates of the Caribbean movies. Piracy is big business in Somalia; pirates took in an estimated $150 million last year, according to Kenyan officials. As of mid-April, Somali pirates were holding more than 280 sailors hostage on 15 ships — hoping to extort millions of dollars more.

So what does this have to do with hedge funds?

Quite a bit, actually. The troubles in Somalia are representative of the rising geopolitical and economic tensions around the globe, ranging from the frighteningly familiar — the expulsion of nuclear inspectors from North Korea after that country fired a rocket over Japan — to the brazenly bizarre (workers at a Caterpillar factory in France recently holding their bosses hostage to protest proposed layoffs). The world is on edge, and investors have suffered enormously.

Many, including some well-respected hedge funds, have seen their wealth cut in half since September. But, as Alpha London Bureau Chief Loch Adamson reports in this month’s cover story (“New World Masters”), one group of hedge funds has found a way to profit from the chaos. Global macro managers — known as the hedge fund industry’s most swashbuckling investors — have delivered positive returns during the past year by making sweeping bets on bonds, currencies, commodities, equities and interest rates.

Now, that’s a pirate’s tale worth telling.