2/25/10

HOW'S THE HEDGE GROWING? POST 9

HI,

We're not quite done with the various items that are getting attention in the news of recent ECONOMICS.

The careful readers will come across what is called a NAKED SHORT SALE (No, the broker did not get that way). Guess what?? Right! No borrowed stock. (Nada-nothing invested). That means the seller invests NOTHING but a PROMISE (HYPOTHECATED SHARE) to sell in 3 days (T+3). The seller makes a short sale and receives a split dividend on a promise( not like marriage-no divorces allowed or it becomes fraud). This has become ILLEGAL except under limited circumstances by MARKET MAKERS (remember them).

Investment companies like HEDGE FUNDS have used short sales extensively. (not necessarily NAKED SHORT SALES)-although some may have worked through the Market Makers).

HEDGE FUNDS?????? Has the market gone another shade of green?? Nope! HEDGE FUNDS denote a LIMITED INVESTMENT FUND with allowed aggressive strategies unavailable to MUTUAL FUNDS especially SHORT SALES. HEDGE funds make large bets on market movements using borrowed money to substantially leverage (expand) their returns. The losses can be huge at ten to one odds. (BACK TO OUR LESSON IN LAS VEGAS).

Not a transaction for the small investor. The various HEDGE funds use a wide variety of strategies and set themselves up as INVESTMENT COMPANIES (a company primarily engaged "in the business of investing, reinvesting or trading in securities"

There are a variety of Investment Companies. MUTUAL FUNDS are familiar: OPEN END -has unlimited redeemable public shares; CLOSED END- a fixed number of non-redeemable shares; INTERVAL FUNDS- have periodic repurchase offers at net asset value; business development companies (BDC)--closed-end funds with investment in small and developing or troubled businesses; ETF (exchange traded funds)--tracks the included stocks by index performance; UNIT INVESTMENT--no officer structure and an almost fixed portfolio of stocks; FACE-AMOUNT CERTIFICATE-issues face-amount installment certificates(only a few of these). All the Investment Companies are designed to make the most profit for investors.

HEDGE FUNDS, although Investment Companies, do not have to register with or report to the SEC, a condition that is changing since the downturn. Each HEDGE FUND has less than one hundred qualified, wealthy, and sophisticated shareholders and has no public offering.

Why is the public interested in these investments? HEDGE FUNDS are "betting the farm" with (among other things) PENSION FUNDS (or retirement funds).Hedge Funds aim at high-risk, large returns. The odds are calculated at about ten to one with this type of investment practiced GLOBALLY as well as in the U.S.A. The Pension funds accumulated after a lifetime of work are at the front lines.

"So, ya think this is your lucky day, do ye Chump?"

Most state pensions in the U.S.A. were part of HEDGE FUNDS when the market collapsed. Many states were lucky that their HEDGE FUND leaders bet on the fact that the market would go down WHEN the short sale, bundled securities appeared in great numbers, and those Funds scored a big return. But the HEDGE FUNDS have shown massive losses in recent months thus putting pension funds at risk.

HEDGE funds are extremely controversial. Some Government officials blame them for the market drop. Others point out that larger profits in the Pension funds were needed to keep apace with the economy. I am "still out to lunch" on my opinion of the risk and the profit/loss ratio. However, across the globe HEDGE FUNDS are still active and the powerful seem to feel that they are needed in the markets. More on this part of the economy as it develops.

As we examine what goes into Economics, it becomes obvious that they were developed as a Social Science because the methods of finance, trade, and interaction have become so complicated and intertwined that explanations are often needed. The multiple opinions on the rightness and wrongness of a given action is often hotly debated.

As we explore Economics many issues such as NAKED SHORT SALES AND HEDGE FUNDS that seem to be inside the area of the stock market can also become a dating item in the Social Science of Economics explored by contesting viewpoints.

A social science is not a PROVEN science but rather an ASSUMED science. It is more often based on observation, historical data, statistical data, author bias, and a few hard, cold facts. It is THE EXPLANATION of WHY something is the way it is by someone who is considered an authority on the subject because of constant study. This Blog could be considered an ASSUMED SCIENCE IF I were considered an authority on the subject. (YEAH! RIGHT!) Notice the inherent dangers in the Social Sciences!

What does MY explanation of THE EXPLANATION reveal? That interpretation plays a huge role in this 'SO-CALLED SCIENCE".

Economics is valued for the clarity it often brings to a Cluttered Mess as well as its use of visual capabilities via graphs, drawings and photos. Its limitations rest in the fact that it is a very useful vehicle for distortion (both planned and unplanned).

The media picks up a myriad of authored articles in the Social Sciences and often reports them as fact. We see distortions in various aspects of society and its interaction with the environment, health, safety etc. The weather gets involved, when social science tries to show our expertise on nature. This information can be carried forward to become so "real" that the public accepts the assumption as fact. We'll see some of this as we continue.

Remember the old "saw" for assumptions! ? ASSUME makes an Ass out of U and ME.

We'll take a look at the Going GREEN debate in our next post. Although the environment is a part of the Physical Sciences (hard science-not about people),the ongoing debates over GLOBAL WARMING makes it a people issue. It now is also a part of Economics and our financial future.
Cheers, Connie

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