If you think that the Securities and Exchange Commission extrudes those volumes of regulations to protect you the consumer, then I have a bridge to sell you; Quite the opposite. Those regulations that the SEC mandates actually make it nearly impossible for you to dream the big American dream. The chances of the ordinary investor getting a chance to invest in that little start up that will become the next Microsoft, IBM or CISCO Systems are slim to impossible, especially if the SEC has anything to do with it!
Don’t feel alone, however; smaller companies are also being converted into cash through the machinations of the SEC’s familiars.
That is why your chances of living out a comfortable retirement, or having the luxuries you see enjoyed by others, or participating in the wealth reserved for the elite few; those "qualified" to invest in a Hedge Fund are null.
The SEC wants you exactly where you are; a working "John" who makes a day’s wages for two days’ work, worrying about whether your 401K will be enough, and whether the corporation you spent your life working for will go through down-sizing, or worse, "bankruptcy," and thus default on your retirement benefits.
It is ugly, but it is the reality faced by most Americans today.
Governmentt carefully couches the text in terms both esoteric and bland, designed to firmly close the door on your real participation in the wealth produced by America. This happens in ways you never even imagined, all the while simulating a system they proclaim to be for your protection. But the only ones protected are the "Good Ole Boys." You scrape by with pennies, they make trillions. Hedge Funds are at present their favorite form of thievery.
Welcome to Plantation America, where ownership is more subtle but as sure as any experienced by a shackled slave in the Old South.
Here are a few terms you need to understand before we get started.
Hedge Fund. This is an investment pool where a limited number of elite investors, usually 100 or less, invest usually one million or more dollars each. Many Hedge Funds are so exclusive that their minimums are 100 million for each investor. Hedge Funds are often described as "a managed portfolio that targets a specific return goal regardless of market conditions." Translation: To do whatever is required to bring in the money. Those "strategies" include several sophisticated strategies such as: short selling, arbitrage, hedging, and leverage. These are few words that disguise the meaning of "steal it" with more taste.
Short selling. This is selling stock or another commodity whose value is expected to decline. It has two flavors — naked and covered. Naked means to sell what you do not really own. Covered means you own it and you sell it, repurchasing for less after its price has declined.. Remember this because it’s an important part of the rest of the story! I should point out that this is illegal in every other aspect of life, but was declared legal by those closely associated with the Fed, the securities industry, and U.S. Treasury, which makes perfect sense if you understand what they really do.
Arbitrage means trying to profit by exploiting price differences of otherwise identical or similar "financial instruments." You move around to find different values placed on these. Financial Instruments are things that are paper, but valuable, like mortgages, notes, bonds, and securities. They like this best when they can simultaneously buy and sell the same item, making money instantaneously through a spread. A simple analogy of arbitrage is… ever notice that when you buy a stock you always seem to pay the highest ask, and when you sell it you always get the lowest bid! You have just been arbitraged!
Hedging. This is like betting on both horses in a two-horse race. One horse is the favorite and you bet enough there to cover the whole amount of both bets if Dobbin wins. But you collect really big if the other horse comes in first. You risk nothing! Brokerage firms lend out your stock that you have in the street name, and do this all day long with your assets and don’t have to pay you a dime! To prevent this, simply take delivery of all your long-term stock investments. Otherwise know that the firm will use your stock to make them money. They will not tell you this or share the profit.
Leveraging is when you borrow money from someone else and use that money to buy something at a lower price than you can sell it for. You will already have it sold before it arrives. In other words, if you are a brokerage firm this means you borrow money from your clients, without their knowledge, to lend to a company issuing the stock who you are helping go public. The brokerage company sells you the stock for 50% less than it will be priced on the street at the IPO. Now you get commitments from clients who are agreeing to buy that same stock in the underwriting syndicate with a 5% markup over the IPO price or 55% more than you are paying. The price charged here is referred to as a premium, for whom you can see. From this is deducted the kick-backs, reimbursements of expenses, and that vacation to Hawaii on the private jet for the firm’s major executives.
If you have kept track of the profit the firm made, here’s how it works. They used your money (no firm capital at risk), they lent it to a private company they are taking public to buy stock at 50% or less of the market value, and they sell it to you for 5% more than the IPO that’s a 105% profit on your money for the firm, and all you get as Joe Paycheck investor is to own the stock that has now been fully diluted. This is the protection racket run by those friendly folks we call the SEC and its network of crony brokerage firms and political watchdogs.
They don’t pay you interest on the money most of the time; the subject is never mentioned. When the market turns south you wonder how you could lose so much money so quickly!
PIPES - Private Investment in Public Enterprise is also a type of Hedge Fund.