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It's a proprietary strategy!

"It’s a proprietary strategy, I can’t go into great detail."

This was the answer that Mr. Madoff, the former chairman of Nasdaq, gave when asked a few years ago how he was able to give such steady returns. He has now been arrested and he’s admitted that his hedge fund was one big Ponzi scheme.

This would have been the same answer that you would have got from many hedge fund’s if you actually had the insolence to ask them what they might be doing with your money. Which might make you think about the difference between a Ponzi scheme and the strategies of many hedge funds who put together strategies that worked most years but then completely blew up eventually.

Any options trader will know that this is an easy strategy to create by going short premium, which will work 4 years out of 5, and you hope you collect a few bonuses before the 1 in 5 years “Black Swan” comes along.

As we now reflect on the credit bubble period, where hedge funds opened every day to take advantage of the ever expanding financial casino, its quite clear that Warren Buffet was yet again spot on in describing hedge funds as a “Repackaging of remuneration.”.

In 2007 over half of the highest earners in the US were in finance, and most of those running hedge funds. I dare say Mr. Madoff was one of them. This was the pinnacle of the great re-allocation of wealth that took place as the financial system continued to enrich its participants at the loss of just about everyone else.

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Comments: (1)

A Finextra member
A Finextra member 16 December, 2008, 10:56Be the first to give this comment the thumbs up 0 likes

 

"In 2007 over half of the highest earners in the US were in finance, and most of those running hedge funds. "

In the U.S., a tax break for hedge fund managers costs billions in tax revenue. This special tax treatment given to hedge fund managers has been said to result to a low estimate of $6 billion in lost tax revenue. Hedge fund managers' pay standard is what is called '2' and '20', overhead fee of 2% (of capital managed) and 20% (of the returns of the fund). Based on the U.S. tax code, this 20% is treated capital gains and not ordinary revenue. Capital gains is taxed 15%. The top 3 hedge fund managers in 2006, for example, earned $4.4 billion. The top 25 earned $14.25 billion. Lost tax revenue from this top 25 earners amounts to $2 billion.

These few people earn so much that they can afford to hire their own high paid lobbyists such as Douglas Lowensterin and Glover Norquist. These lobbyists of course warns the politicians that changing tax code to tax hedge fund managers like the rest will harm the average working family. Time and time again, these individuals show that not only don't they need these tax breaks but some of them actually have perpetrated some of the most spectacular failures and illegal activities such as IPO manipulation and fraud (like this ponzi scheme by Madoff).

Then, we also have Investment banks being accused of helping their high-end clients break tax law. Actually, this is hardly a surprise. Actually in September 2008, the U.S. Senate Permanent Subcommittee on Investigations released a report which singled out Morgan Stanley, Lehman Brothers, Deutsche Bank, Merrill Lynch, UBS and Citigroup. The report found that "over the last 10 years, banks have sold and carried out transactions in the guise of complex financial products that are meant to disguise dividend payments as nontaxable". This report mentions keywords such as "dividend enhancement" and "dividend uplift", "complex equity swaps", "fake loans", "sham stock sales","stock-swap agreements", "offshore tax havens" to disguise dividend payments made to clients.

Therefore, not only did the fund managers make a bundle from these tax 'breaks', investment banks also have actually been using innovative financial products to help their clients maximize their dividends by avoiding taxes.

And they are now being bailed out. WOW.

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