Hedge Fund Ponzi Two and Twenty and Five
The title of this page is a little misleading but just to extend "Ponzi" theme I will call it that. What hedge funds are doing is just taking advantage of the effects of USAPonzi namely the 5% asset inflator that is a byproduct of USAPonzi. (see Inflation-A Byproduct of USAPonzi) The way hedge funds work is they collect large amounts of money from already wealthy investors and promise better than market average returns to these investors. For this better than average return they get paid handsomely and for the most part deservedly so because they frequently can demonstrate this performance year after year. So these hedge fund managers are shrewd people or they do not stay in business and the general model for these hedge fund is from my perspective totally legal and ethical.
But they are implicitly taking advantage of the weakness of our Federal Government's accounting system since it for that last 45 years has made investing in equities almost a sure thing because of the USAPonzi asset price inflator of 5% per year.
But even with the 5% almost guaranteed return in the equity market hedge fund managers are also able to achieve even better returns for themselves by their fee structure. These fees for the top hedge funds are often called "Two and Twenty", meaning that if you will give me your money I will give you a great return but I want to get 2% of your money every year and 20% of the profit that I return to you. I think this "Two and Twenty" should now be called "Two and Twenty and Five" because of the 5% USAPonzi asset price inflator. So is it any wonder that successfull hedge fund managers get rich. They are managing huge amounts of money of which they get 2% a year right off the top, the Federal Government is essentially guaranteeing that asset prices will go up by 5% a year and the hedge fund manager gets 20% of that. So the hedge fund manager has basically 3% (2% + 20% of 5%) in the bag before he lifts a finger and is only working for upside from that point forward. Yes he has to perform to continue to retain investor confidence (and their money) but you have to admit this is nice work if you can get.
This hedge fund model will be much less profitable when USAPonzi implodes. It should still work but it will not be as lucrative for the managers. Also many of these hedge funds will likely lose a tremendous amount of their corpus when the implosion occurs.
So I am not saying that hedge funds are a Ponzi scheme, I am saying that they are getting a tremendous lift from a Ponzi scheme.
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