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article imageOp-Ed: Where did those trillions go in the big crash? To the Caymans

By Alexander Baron     Nov 21, 2011 in World
The front page of today's 'Financial Times' has a story about the Cayman Islands. Do you know where they are? Who lives there? The population? Or how much of your money has been squirrelled away there by the parasites of international finance?
The Cayman Islands is a tax haven, but although hedge funds are registered there, they operate from London and other financial centres. There are actually more corporations in the Caymans than people, a tropical paradise that has no income tax, and the highest standard of living in the Caribbean.
According to the Financial Times, there are around 8,000 hedge funds in the Caymans, and now that the world economy has plummeted, they are under pressure from pension schemes and investors. Do you know what a hedge fund is, and what it actually does?
According to that font of all knowledge, Wikipedia, a hedge fund is “a private pool of capital actively managed by an investment adviser”.
Under “Fees” the reader is told: “Hedge fund managers typically charge their funds both a management fee and a performance fee.
Management fees are calculated as a percentage of the fund's net asset value and typically range from 1% to 4% per annum, with 2% being standard”.
There is also a performance fee which “is typically 20% of the fund's profits during any year, though they range between 10% and 50%. Performance fees are intended to provide an incentive for a manager to generate profits.”
Got that? The first of these sounds modest, 2% per annum, but 2% of what? The second does not sound anything like as modest, but let's stick with the 2%. If you play roulette, betting only on even chances, the house percentage is only 1.35%. Now answer this question: If you were to walk into a meeting of Gamblers Anonymous, how many roulette players would you meet, and how many casino owners?
Whether you are betting on even or odd, black or red, high of low, the house has that 1.35% on every spin, and it builds up over the course of the evening. Spin the wheel a thousand times, and every time the little white ball stops on zero, the house catches up with you. Now invest a million pounds for one year with a 2% fee, and the “house” takes £20,000. Over ten years, it takes £200,000. That is a fifth of the total, a fifth of your pension. That is not so bad when the stock market is going up, but what happens when it falls? You're still paying that 2%, and don't even mention the performance fees, which will be deducted anyway.
So how do hedge funds make money? The short answer is, they gamble. Check out this eleven minute video, and pay close attention to what the presenter says about leverage, then ask yourself how this differs from gambling? The big difference is that they are gambling with, among other things, the money ordinary, decent hard working men and women have set aside for their retirement. And that could include you.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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