Hedge funds have evolved, basically as a whole sale version of stock brokers. If you read the national papers of the U.K. or U.S.you will have heard about hedge funds, possibly when one is about to prevent the demize of a large company. The financial newspapers have a slightly biased point of view, a more favourable view than they deserve, of these kinds of organisation, but you must understand that the existence of hedge funds, private equity companies and stock markets are the sole reason why the financial papers exist.
A hedge fund could be described something like this;
"What hedge funds tend to have in common is a dedication to an extreme form of capitalism - but not a lot else. Hedge funds engage in a bewildering range of activities. Some buy and sell whole companies, just like private equity. Or they deal in commodities, or individual shares, or bonds, or currencies, or the debt of troubled companies, or complex financial products like credit default swaps and collateralized debt obligations. They are responsible for transactions worth trillions of dollars every year. And what they endeavour to do is measure the intrinsic riskiness of holding a particular asset which could be some shares, or property, or anything tradable at all, and then see if that risk has been captured in the market price of that asset. If the price is too low relative to the risk, they would buy the asset. If it is too high, then they would sell the asset."
-This is the usual type of explanation for hedge funds if you were to read one of the finanacial papers.
Although hedge funds are successful, from the point of view of getting a return for the investor, as you will see from the following explanation, how they achieve this and the affects this has on the economy is to say the least, questionable!
If you read books on finance or view internet websites, its difficult to get a clear idea of what hedge funds actually do and the good they achieve. The reasons for this are that, whoever is writing or running the internet site do not really want you to fully understand them. Either that or they don't understand themselves and they are just passing on an interpretation they may have received from another source. You have to understand that a lot of this information for the benefit of potential investors. The information is therefore to create a sense of security to potential investors and encourage them to hand over their cash. Investors are never told that their investment may do some economic damage, but there is no shadow of a doubt that investments are being used in a way that they have caused and continue to cause an apalling economic mess.
Ticket Touts on Steroids.
If you go to a concert or football match to see a very popular performer or football team, you will often find ticket touts around the approaches to the stadium or concert venue. These touts have bought these tickets probably at the face price of the ticket, but gamble on the event being more popular than the original ticket price would suggest. When the touts get it right they can make a lot of money. But they do get it wrong as well. Occasionally a sell out concert or football match will have vacant seats because touts have over estimated the popularity of the event and ended up stuck with a load of tickets. These ticket touts at times get a pretty hard time from the press, for depriving people from what may be an occasional once or twice a year outing. However, I think it is unlikely that any one will die from an over priced ticket for a concert or football match.
If there is any job similar to a hedge fund manager (outside of finance) then it is a ticket tout. Hedge fund managers do much the same job as ticket touts, although there are a few factors which make the two jobs different;-
i)...Money is invested by other wealthy individuals or investment institutions and very little of their own money is used for their buying and selling.
ii)...The investments hedge funds make are usually on a whole sale scale.
iii)...A hedge fund could buy and sell tickets like the ticket touts by buying a ticket agency company, but they could also buy and sell just about anything else.. Including oil, gas, crops, property, company shares, complete companies, debt from banks, debt from businesses, debt from governments.
But they are the savior of businesses..........once they have gone out of business!
Although the financial press will often report that a business is being rescued by a hedge fund, what actually has usually happened in reality is the hedge fund waits for the company to collapse so that the debts are wiped out. Hedge funds will then be ready waiting, with cash at the ready to buy the company at a bargain price without the unwanted baggage , the debt.
Hedge fund rules are few and unenforsable.
Hedge funds have diffrent regulations from other fiancial institutions such as banks as far as what they can invest in is concerned. They are allowed to take on investments that would be of too high risk to banks. Also, the investors into hedge funds must be individuals who are particularly wealthy or institutions that invest on behalf of a large number of individuals such as pension funds, foundations and insurance companies.
However, although ordinary individuals with investment accounts are prevented from investing in hedge funds, the banks are aloud to lend our invested money in bank accounts to the hedge funds. In any hedge fund purchase, the hedge fund investors money is used as the 'equity' or deposit (even though its really debt!) in a deal and the bank may lend an other four or five times the equity to complete the finance for the deal.
Basically, what this means is lots of us are investing in hedge funds, but most of the profits are going to the hedge fund managers and the investors directly linked to the hedge funds. This is one of the reasons hedge funds are able to make a lot of money. They are using a lot of our money without us knowing, but keeping the majority of the profits for themselves. The banks could be making the same investments the hedge funds are making, but rules prevent the banks from making the same type of investments. So they hand our money to the hedge funds and the bankers and hedge funds share the spoils,leaving us with maybe a little interest.
Although the British based hedge funds are regulated by the F.S.A. there is a problem. This is that British banks deal with U.S. based hedge funds which have different regulations to the U.K. hedge funds. In fact different to the degree that U.S. hedge funds do not have to register with the U.S. equivalent of the F.S.A., the S.E.C. I the British banks are making deals with U.S. hedge funds, which are not being regulated by the F.S.A or any one else then you may as well have a system where there are no regulations and no regulators.
Since the financial crisis the S.E.C. in the U.S. have looked into regulating hedge funds, but would appear not to have made any specific new regulations that the hedge funds now have to adhere to. There have only been some very general points about overseeing the hedge funds to make sure they are not taking excessive risk with investments.
The S.E.C. has this statement within an analysis of the financial crisis;
"In the U.S., a few years ago, the S.E.C. unsuccessfully attempted to regulate hedge funds."
It seems like it was a bit of a half hearted attempt at it. However, here are a few reasons which would make it difficult to regulate. The following shows the total funds managed by the U.S. hedge funds and how they rapidly increased leading up to the crisis;
1990 $38 Billion
2002 $625 Billion
2007 $1.9 Trillion
2008 $1.3 Trillion
In 2006, hege funds were responsible for half the trading on the New York stock exchange. It is clear it would be a difficult task to oversee all this activity.
- There is a final note on hedge funds which is this. In researching the differences between hedge funds and other financial institutions, the most significant difference and important factor is this. You have to be a wealthy individual or the manager of an institution which qualifies you as an investor into hedge funds.
-Yet the rest of us are all investing in hedge funds through bank account savings- through the banks lending of leverage (loans) to the hedge funds. And also through insurance companies whch affects just about all of us in some way. Lots of insurance companies rightly or wrongly invest heaps of cash in hedge funds. (By the way this makes a total mockery of the insurance industry that we entrust to them. They are affectively gambling our insurance funds) Any way what the point is, is that all the ordinary people are investing in hedge funds one way or another, but the profits from them are only benefitting a few. Basically hedge funds apear to be a club which has benefits exclusive to the wealthy, but which we are all feeding. Almost as if it was a pipe line running between the ordinary working people to the wealthy.
This was first posted in March 2012.
A hedge fund could be described something like this;
"What hedge funds tend to have in common is a dedication to an extreme form of capitalism - but not a lot else. Hedge funds engage in a bewildering range of activities. Some buy and sell whole companies, just like private equity. Or they deal in commodities, or individual shares, or bonds, or currencies, or the debt of troubled companies, or complex financial products like credit default swaps and collateralized debt obligations. They are responsible for transactions worth trillions of dollars every year. And what they endeavour to do is measure the intrinsic riskiness of holding a particular asset which could be some shares, or property, or anything tradable at all, and then see if that risk has been captured in the market price of that asset. If the price is too low relative to the risk, they would buy the asset. If it is too high, then they would sell the asset."
-This is the usual type of explanation for hedge funds if you were to read one of the finanacial papers.
Although hedge funds are successful, from the point of view of getting a return for the investor, as you will see from the following explanation, how they achieve this and the affects this has on the economy is to say the least, questionable!
If you read books on finance or view internet websites, its difficult to get a clear idea of what hedge funds actually do and the good they achieve. The reasons for this are that, whoever is writing or running the internet site do not really want you to fully understand them. Either that or they don't understand themselves and they are just passing on an interpretation they may have received from another source. You have to understand that a lot of this information for the benefit of potential investors. The information is therefore to create a sense of security to potential investors and encourage them to hand over their cash. Investors are never told that their investment may do some economic damage, but there is no shadow of a doubt that investments are being used in a way that they have caused and continue to cause an apalling economic mess.
Ticket Touts on Steroids.
If you go to a concert or football match to see a very popular performer or football team, you will often find ticket touts around the approaches to the stadium or concert venue. These touts have bought these tickets probably at the face price of the ticket, but gamble on the event being more popular than the original ticket price would suggest. When the touts get it right they can make a lot of money. But they do get it wrong as well. Occasionally a sell out concert or football match will have vacant seats because touts have over estimated the popularity of the event and ended up stuck with a load of tickets. These ticket touts at times get a pretty hard time from the press, for depriving people from what may be an occasional once or twice a year outing. However, I think it is unlikely that any one will die from an over priced ticket for a concert or football match.
If there is any job similar to a hedge fund manager (outside of finance) then it is a ticket tout. Hedge fund managers do much the same job as ticket touts, although there are a few factors which make the two jobs different;-
i)...Money is invested by other wealthy individuals or investment institutions and very little of their own money is used for their buying and selling.
ii)...The investments hedge funds make are usually on a whole sale scale.
iii)...A hedge fund could buy and sell tickets like the ticket touts by buying a ticket agency company, but they could also buy and sell just about anything else.. Including oil, gas, crops, property, company shares, complete companies, debt from banks, debt from businesses, debt from governments.
But they are the savior of businesses..........once they have gone out of business!
Although the financial press will often report that a business is being rescued by a hedge fund, what actually has usually happened in reality is the hedge fund waits for the company to collapse so that the debts are wiped out. Hedge funds will then be ready waiting, with cash at the ready to buy the company at a bargain price without the unwanted baggage , the debt.
Hedge fund rules are few and unenforsable.
Hedge funds have diffrent regulations from other fiancial institutions such as banks as far as what they can invest in is concerned. They are allowed to take on investments that would be of too high risk to banks. Also, the investors into hedge funds must be individuals who are particularly wealthy or institutions that invest on behalf of a large number of individuals such as pension funds, foundations and insurance companies.
However, although ordinary individuals with investment accounts are prevented from investing in hedge funds, the banks are aloud to lend our invested money in bank accounts to the hedge funds. In any hedge fund purchase, the hedge fund investors money is used as the 'equity' or deposit (even though its really debt!) in a deal and the bank may lend an other four or five times the equity to complete the finance for the deal.
Basically, what this means is lots of us are investing in hedge funds, but most of the profits are going to the hedge fund managers and the investors directly linked to the hedge funds. This is one of the reasons hedge funds are able to make a lot of money. They are using a lot of our money without us knowing, but keeping the majority of the profits for themselves. The banks could be making the same investments the hedge funds are making, but rules prevent the banks from making the same type of investments. So they hand our money to the hedge funds and the bankers and hedge funds share the spoils,leaving us with maybe a little interest.
Although the British based hedge funds are regulated by the F.S.A. there is a problem. This is that British banks deal with U.S. based hedge funds which have different regulations to the U.K. hedge funds. In fact different to the degree that U.S. hedge funds do not have to register with the U.S. equivalent of the F.S.A., the S.E.C. I the British banks are making deals with U.S. hedge funds, which are not being regulated by the F.S.A or any one else then you may as well have a system where there are no regulations and no regulators.
Since the financial crisis the S.E.C. in the U.S. have looked into regulating hedge funds, but would appear not to have made any specific new regulations that the hedge funds now have to adhere to. There have only been some very general points about overseeing the hedge funds to make sure they are not taking excessive risk with investments.
The S.E.C. has this statement within an analysis of the financial crisis;
"In the U.S., a few years ago, the S.E.C. unsuccessfully attempted to regulate hedge funds."
It seems like it was a bit of a half hearted attempt at it. However, here are a few reasons which would make it difficult to regulate. The following shows the total funds managed by the U.S. hedge funds and how they rapidly increased leading up to the crisis;
1990 $38 Billion
2002 $625 Billion
2007 $1.9 Trillion
2008 $1.3 Trillion
In 2006, hege funds were responsible for half the trading on the New York stock exchange. It is clear it would be a difficult task to oversee all this activity.
- There is a final note on hedge funds which is this. In researching the differences between hedge funds and other financial institutions, the most significant difference and important factor is this. You have to be a wealthy individual or the manager of an institution which qualifies you as an investor into hedge funds.
-Yet the rest of us are all investing in hedge funds through bank account savings- through the banks lending of leverage (loans) to the hedge funds. And also through insurance companies whch affects just about all of us in some way. Lots of insurance companies rightly or wrongly invest heaps of cash in hedge funds. (By the way this makes a total mockery of the insurance industry that we entrust to them. They are affectively gambling our insurance funds) Any way what the point is, is that all the ordinary people are investing in hedge funds one way or another, but the profits from them are only benefitting a few. Basically hedge funds apear to be a club which has benefits exclusive to the wealthy, but which we are all feeding. Almost as if it was a pipe line running between the ordinary working people to the wealthy.
This was first posted in March 2012.
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