Saturday, 16 May 2009

Why Do We Allow Hedge Funds?

Hedge Funds have been at the centre of the economic disaster we have been suffering. While we spit and shout about the likes of Fred Goodwin, the principle reasons why markets failed, and we have had to spend incomprehensible amounts of money to bail out banks, is that we have allowed Hedge Funds to grow unchecked.

Hedge Funds are special investment vehicles which regulators allow to invest in a wider range of 'investments'. They are usually closed shops of private investors - you and I cannot be a part of it and they are given virtually limitless scope to make money. They also have virtually limitless power to pay their own managers enormous sums of money, most which, as usual, go untaxed. In fairness, some of the money they invest does filter down into ventures in new businesses or technology, but the lionshare of all their investments go into betting on the markets, commodities, companies, derivatives, debts and whatever else they fancy and the most fanciable is shorting - betting on demise. The 'hedging' is the loose term to suggest that they tend to offset their risks by betting all ways, hence they seem to be given widest latitude to shaft us all.

Hedge Fund managers are the real 'bonus' earners. If we think Bob Diamond and Nicola Horlick earn big money, even a failing Hedge Fund manager like Martin Hughes of the Toscafund that saw an 83% drop in profits last year, paid himself £14.9m - a massive pay cut from the previous year when he got paid £75m. He is relatively small fry - our Hedge Fund managers tend to earn far less than their US counterparts who can pocket literally $billions in a year.

Many are the stateless nomads that live in the chasm in this world that pays little or no tax. Having earned all that money, they believe they are above petty rules to share out anything they earn. They are doing a job for their investors and for that they can have almost limitless wealth.

In amongst all the financial turmoil we are in, no one has sought to rein in Hedge Funds and bring them into the real world. They perform a nice task for the financial centres, you see. They are the providers of this limitless pot of money that slops around the system that Gordon Brown wants to keep circulating. So it doesn't matter how much they earn or how they earn it, or whether their managers pay tax - they are the Gods of democracy and free market enterprise.

While we wallow in the mire of sordid MPs' doings, the Hedge Funds are back at it again. Making £billions and paying themselves each year more money than we will receive should we win the lottery jackpot every year. Of course, now that they have control of the system, we cannot do without them - so they can dictate the terms and tell us how much money we can use.

We bailed out the banks and we tried to kick start this terrible world of skewed earnings all over again. No regulation to curb the excesses, just bank bonuses. We didn't even scrape the surface of the real issue and cancer in the financial system. It's why this will happen again and again - and they will keep making vast sums of money on our demise.

But then again, as we have found this week - our MPs won't curb the excesses of these Hedge Funds as they would dearly love a piece of the action themselves. Then their sink plugs can be gold plated not brass like the rest of us.

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