Hedge funds are tax loopholes that allow the rich to become richer with little risk to themselves by using borrowed money to speculate, that is gamble, in financial markets where you and I the taxpayers bear most of the risk.
If you or I invest in the stock market, we can borrow no more than 50% of what we invest. That is a government regulation. On the other hand, a hedge fund in some cases can borrow as much as 99% of their investment. That means a 1% increase in the worth of the investment can double the hedge fund's money. A decrease of 1% can wipe them out. The kicker is that hedge funds borrow so much that banks and governments cannot allow their losses to stand because the shock to international markets could cause the worldwide financial system to collapse. It's a case of heads they win, tails the taxpayers lose.
Only the wealthy are allowed to invest in hedge funds which are largely unregulated. The taxes the wealthy pay are less than what are paid by investors in the stock markets. Hedge funds charge their investors 2% per year to manage the funds and take 20% of the gains if any that they manage to win. No wonder hedge funds can afford to pay their owners/managers 100's of millions per year.
How do I start a hedge fund? Hire a bunch of smart people to write computer programs (algorithms named after former VP Al Gore the inventor of the internet) that spot differences in the markets for financial products wherever they occur on earth. The differences can be momentary and small but the sums of money involved are huge. The computer programs model the real world and work well until the unexpected occurs. Then huge losses are a possibility and you and I will be forced to stand those losses through taxes that finance government giveaways.
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