Hedge fund manager warns of derivatives time bomb By Gary Parkinson (Filed: 03/07/2002)
Tony Dye, the fund manager dubbed Dr Doom for his pessimistic outlook on stock markets during the technology boom, warned yesterday of a "lurking time bomb" of creative accounting in the derivatives market.
The value of contracts in the over-the-counter derivatives market has hit $110 trillion (£72 trillion), he said, with the market now worth three times the global economy.
Speaking at a hedge fund conference in London, Mr Dye said: "The question is why people are using them so much. The real reason must be because some people are using these for creative accounting purposes.
"My guess is that there'll be some real nasties in the derivatives market in the next 12 to 18 months."
At the same time, Mr Dye, the outspoken former chief investment officer of Swiss-owned fund manager Phillips & Drew (P&D), estimated fair value in equity markets at 60pc of current levels.
He said he had a negative view of stock markets and the American economy, and strongly disagreed with fund managers who are recommending clients buy equities at current levels.
"The question is when we reach this fair value," Mr Dye said. "If it is in the next six months, it is going to be very awful. If it takes longer, medium-term return on equities are going to be very low over the next five to 10 years."
Under Mr Dye, P&D spurned investments in technology companies and stuck to safer old economy stocks. Its comparative performance suffered and Mr Dye, once regarded as one of the City's foremost investment gurus, was hounded out of a job. In February 2000 he stepped down after 15 years as head of investment at P&D.
However, within two weeks of his departure, the Nasdaq technology index peaked and many of his predictions began to be proved correct.
Now an independent hedge fund manager, Mr Dye reckoned that the end of 10 years of a bull market in the 1990s was exposing "the aggressiveness of chief executives and accountants in creating fictitious numbers".
He warned: "We're getting into that period when we'll see all the fraudulent practices come to the surface. I'd like to remind people that in 1991-1992, people didn't realise that Japanese banks were almost bankrupt."
