Hedge funds

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To the editors,

Hedge funds are one of many types of speculative trading that endanger the worldwide financial system.

A hedge fund is a private-investment vehicle, operating as a limited partnership, that invests in debt, complex derivatives, stocks, bonds, options and commodities.

Hedge fund managers often enjoy astonishing payouts, some in excess of a billion dollars in a year.

But just how much is a billion dollars, and does this investment practice have an undesirable effect on our society?

One billion expressed numerically is 1,000,000,000. A billion is one thousand times larger than a million.

We can factor the product of one billion into two interesting numbers that, when multiplied together, make one billion.
Fifty-thousand times 20,000 equals 1 billion (or 50,000 X 20,000 = 1,000,000,000).

If we put a dollar sign on the 50,000, it equals about the average annual salary in the U.S. We can now see that 20,000 workers making $50,000 per year make a total of $1 billion, an amount similar to the yearly take of some hedge fund managers.

In 2015, some actual hedge fund managers made the amounts shown in the table below. As a group in 2015, the top-25 hedge fund managers made a total of $12.94 billion!

2015 hedge fund managers’ earnings

1 Ken Griffin Citadel $1.7B 34,000
1 James Simons Renaissance Technologies $1.7B 34,000
3 Raymond Dalio Bridgewater Associates $1.4B 28,000
3 David Tepper Appaloosa Management $1.4B 28,000
5 Israel Englander Millennium Management $1.15 23,000
—————— Top 25 Hedge Fund Managers $12.94B 258,800

(*”Jobs” defined as making $50,000 per year and adding value with a useful product or service. “Equivalent number of jobs” per year calculated by dividing 2015 hedge fund earnings above by $50,000; source)

The table illustrates how these kinds of financial transactions can take a heavy toll on overall employment and our society. Unlike investing for the long-term, hedge funds use high-speed networks to make frequent trades. The data strongly suggest that, in 2015, a mere 25 hedge funds employing perhaps a few hundred people extracted enough money from our economy to pay over a quarter-million workers for a year.

And it gets better: Hedge funds are permitted to reduce their taxation by using carried interest, meaning the earnings are taxed as long-term capital gains at 20 percent. The top tax rate for ordinary income is 39.6 percent and starts at taxable incomes from approximately $415,000 to $467,000.

More recently, a common practice for hedge funds is to set up a reinsurance business in Bermuda to further reduce tax obligation.
Reinsurance is insurance purchased by an insurance company from one or more other insurance companies as a means of risk management.

Clearly, all such financial activity is enabled by politicians and inept regulators.

Bill Arnold
Nichols Hills