Hedge funds?

dividendhero

Worth pointing out that while most hedge fund managers are based in places like Mayfair, the hedge funds are normally registered in the likes of the Cayman Islands

Anyone who fancies making a quick buck can set up two hedge funds, each taking a contrary position. The "winning" fund will earn you a juicy performance fee :beer:

bowlhead99

maxie014 wrote: »

Thanks for the replies i was just interested as they are often mentioned on the money pages.
Sounds like its a rich mans game.

Yes it is a rich man's game; if you don't have a large amount of assets there is no need to use alternative Investments to hedge the returns from your mainstream investments.

dividendhero wrote: »

Worth pointing out that while most hedge fund managers are based in places like Mayfair, the hedge funds are normally registered in the likes of the Cayman Islands

Is it worth pointing it out?

If you've ever tried to structure a private investment fund for a diverse set of international investors making pooled investments into a wide variety of international financial instruments, when those investors have a wide variety of home tax jurisdictions and tax statuses (from tax exempt foundations and pension funds and governmental entities, through insurance companies, large corporates, high net worth family offices, funds of funds etc etc)...

... you'll know that it makes sense to create the fund in a tax neutral country which minimises the leakage to tax so that the investors aren't worse off than if they had invested in the underlying financial instruments directly.

For example, the European investors don't want the fund to be in the US because they might get exposure to US taxes on the income generated or even the gross proceeds, even though many of the underlying investments are not in the US. Likewise the US investors (especially the tax exempt ones, but the taxpayers too) don't want to make their profits in a European or Japanese tax paying vehicle that doesn't recognise the particularities of their own tax position. And nobody wants to use a random untried jurisdiction that doesn't have an English-speaking courts system with well-understood common law and precedent.

So, you find lots of hedge funds and private equity funds and real estate funds and infrastructure funds will gravitate to using "the usual" offshore tax jurisdictions such as Bermuda, Cayman, BVI etc as part of their structuring - sometimes in parallel with another fund vehicle in an 'onshore' jurisdiction(s), or in a chain of master-feeder funds to split the various investors into groups with common regulatory needs or tax statuses.

The end result is typically that the investor pays his necessary taxes in his own jurisdiction relevant to him, and the underlying investment pays the necessary corporate taxes on its business operations. But the fund in the middle - which is simply acting as a conduit for the investors (including the income-tax exempt local government pension scheme, and the capital-gains tax exempt Hong Kong family), to participate in the underlying businesses - does not pay a layer of tax itself, because Cayman doesn't seek to tax the fund profits.

Instead Cayman makes adequate money from the fund registration fees, regulatory fees / exemption fees, and the fact that lots of lawyers and administration firms generate income and employment for the local economy while helping to provide the local substance for the fund operations , etc etc.

However, most people *haven't* ever tried to structure a private collective investment scheme for a diverse pool of sophisticated international investors. When they hear 'Cayman' in the media and have heard that Cayman tax rates are lower than UK tax rates and that CI is in the Caribbean, they assume any fund using the jurisdiction when they also have an advisory office in Mayfair or California or New York must be a criminal or money laundry operation where you run the gauntlet of Captain Jack Sparrow each morning to evade your domestic taxes. This is not always the case

Anyone who fancies making a quick buck can set up two hedge funds, each taking a contrary position. The "winning" fund will earn you a juicy performance fee :beer:

This is probably true to an extent, if the fund management company doesn't want to raise more money from investors in the same or another fund in the future - so can afford to have huge losses in its track record, or make someone else take the blame for them as they spin out and launch a new rival firm.

Takedap

maxie014 wrote: »

Thanks for the replies i was just interested as they are often mentioned on the money pages.
Sounds like its a rich mans game.

It's a way of making vast amounts of money by profiteering from other people's misery. Betting on markets crashing & companies going bust.


Jacob Rees Mogg's father wrote several books on how to do it.

Malthusian

Takedap wrote: »

It's a way of making vast amounts of money by profiteering from other people's misery. Betting on markets crashing & companies going bust.

Or more frequently losing vast amounts of money by betting on other people's misery.

Remember that if you buy £10,000 worth of shares with your own money, the maximum you can lose is £10,000 and the maximum you can make is unlimited. If you short £10,000 worth of shares, the maximum you can make is £10,000 and the maximum you can lose is unlimited.

(For those who aren't au fait with how short-selling works, if the company you shorted finds an oil well in the car park and the shares go up to £100,000, you have to spend £100,000 to buy the shares you borrowed back, after getting £10,000 from selling those shares when you initially borrowed them, so you lose £90,000. The best result you can possibly hope for is that the company goes bankrupt, in which case you win £10,000. Short selling is not just buying shares in reverse.)

Brown_Bear

Malthusian wrote: »

Or more frequently losing vast amounts of money by betting on other people's misery.

Remember that if you buy £10,000 worth of shares with your own money, the maximum you can lose is £10,000 and the maximum you can make is unlimited. If you short £10,000 worth of shares, the maximum you can make is £10,000 and the maximum you can lose is unlimited.

(For those who aren't au fait with how short-selling works, if the company you shorted finds an oil well in the car park and the shares go up to £100,000, you have to spend £100,000 to buy the shares you borrowed back, after getting £10,000 from selling those shares when you initially borrowed them, so you lose £90,000. The best result you can possibly hope for is that the company goes bankrupt, in which case you win £10,000. Short selling is not just buying shares in reverse.)

Even if you correctly guess the shares will fall in value - the govt may just decide to ban short selling at that time. So you guess right - but still lose.

dividendhero

Brown_Bear wrote: »

Even if you correctly guess the shares will fall in value - the govt may just decide to ban short selling at that time. So you guess right - but still lose.

If short sellers get their timing right, in theory they should reduce volatility - they "sell" shares at a time of high prices, then "buy" when they're low. Khan Academy does a very good talk on short selling (and a vast array of other topics)

Many funds boost their returns by lending stock to short sellers.

Brown_Bear

dividendhero wrote: »

If short sellers get their timing right, in theory they should reduce volatility - they "sell" shares at a time of high prices, then "buy" when they're low. Khan Academy does a very good talk on short selling (and a vast array of other topics)

Many funds boost their returns by lending stock to short sellers.

That's true.
They also improve liquidity in the market and detect frauds etc.

But for some reason the govt can turn against them at times.

John_G_Jones

maxie014 wrote: »

Thanks for the replies i was just interested as they are often mentioned on the money pages.
Sounds like its a rich mans game.

It is, although I worked on a trading desk once that structured hedge fund investments into products that retail investors could buy. I don’t think that’d be allowed nowadays.

John_G_Jones

Takedap wrote: »

It's a way of making vast amounts of money by profiteering from other people's misery. Betting on markets crashing & companies going bust.


Jacob Rees Mogg's father wrote several books on how to do it.

That’s a bit of a bizarre view. If they are selling it lets others buy, there is a buyer and a seller in every transaction.

dividendhero

John_G_Jones wrote: »

That’s a bit of a bizarre view. If they are selling it lets others buy, there is a buyer and a seller in every transaction.

Thing is that the likes of Reich Mogg control the levers of power and are able to profit from it