The fusor was originally conceived by Philo Farnsworth, better known for his pioneering work in television. In the early 1930s he investigated a number of vacuum tube designs for use in television, and found one that led to an interesting effect. In this design, which he called the multipactor, electrons moving from one electrode to another were stopped in mid-flight with the proper application of a high-frequency magnetic field. The charge would then accumulate in the center of the tube, leading to high amplification. Unfortunately it also led to high erosion on the electrodes when the electrons eventually hit them, and today the multipactor effect is generally considered a problem to be avoided.
What particularly interested Farnsworth about the device was its ability to focus electrons at a particular point. One of the biggest problems in fusion research is to keep the hot fuel from hitting the walls of the container. If this is allowed to happen, the fuel cannot be kept hot enough for the fusion reaction to occur. Farnsworth reasoned that he could build an electrostatic plasma confinement system in which the “wall” fields of the reactor were electrons or ions being held in place by the multipactor. Fuel could then be injected through the wall, and once inside it would be unable to escape. He called this concept a virtual electrode, and the system as a whole the fusor.
Work at Farnsworth Television labs
New fusors based on Hirsch’s design were first constructed in the late 1960s. The first test models demonstrated that the design was effective. Soon they were showing production rates of up to a billion neutrons per second, and rates of up to a trillion per second have been reported.
All of this work had taken place at the Farnsworth Television labs, which had been purchased in 1949 by ITT Corporation with plans of becoming the next RCA. In 1961 ITT placed Harold Geneen in charge as CEO. Geneen decided that ITT was no longer going to be a telephone/electronics company, and instituted a policy of rapidly buying up companies of any sort. Soon ITT’s main lines of business were insurance, Sheraton Hotels, Wonderbread and Avis Rent-a-Car. In one particularly busy month they purchased 20 different companies, all of them unrelated. It didn’t matter what the companies did, as long as they were profitable.
A fusion research project was not regarded as immediately profitable. In 1965 the board of directors started asking Geneen to sell off the Farnsworth division, but he had his 1966 budget approved with funding until the middle of 1967. Further funding was refused, and that ended ITT’s experiments with fusion.
The team then turned to the AEC, then in charge of fusion research funding, and provided them with a demonstration device mounted on a serving cart that produced more fusion than any existing “classical” device. The observers were startled, but the timing was bad; Hirsch himself had recently revealed the great progress being made by the Soviets using the tokamak. In response to this surprising development, the AEC decided to concentrate funding on large tokamak projects, and reduce backing for alternative concepts.
Work at Brigham Young University
Farnsworth then moved to Brigham Young University and tried to hire on most of his original lab from ITT into a new company. The company started operations in 1968, but after failing to secure several million dollars in seed capital, by 1970 they had spent all of Farnsworth’s savings. The IRS seized their assets in February 1971, and in March Farnsworth suffered a bout of pneumonia which resulted in his death. The fusor effectively died along with him.
Believe it or not – this true story is the real destruction that the Wall Street business approach consistently provides. We might today have actual nuclear fusion to generate electricity for America and the world along with untold countless other wonderful things – if this inventor and his team could’ve had the support of the business he created and the rewards from the inventions he designed.
But no, look what happened in the middle of the story and the damages that occurred as a result – we all live with that diminished real return and so do generations of children and families long past his life or ours. That is because of what he didn’t get to do as a direct result of the greed at the expense of all else which took over the way Harold Geneen mis-handled it. He traded the great breakthroughs of our lifetime to buy up businesses that already existed and didn’t need his help to be available to all of mankind and to improve people’s lives for generations as these inventors were dependent on it and denied it.
And that’s what “Atlas Shrugged” is about – what happens when the intelligent aren’t allowed, the creative aren’t tolerated, the greatest are denied access and the endless possibilities inherent in the human mind are leashed by the hideous short-sighted manipulations of “a few in pursuit of greed above all, and to the exclusion of all else.” (my paraphrase)
– cricketdiane, 04-28-10
This is Mr. Farnsworth’s machine – it is a damn good start – sits on a table top instead of taking up miles and miles of space and the absurd energy used in the Tokamak et al. – and that’s some of what we’ve lost because of Wall Street greed – I hope that Mr. Geneen remains in hell forever –
Standard and Poor’s has downgraded the sovereign debt ratings for both Greece and Portugal, with the Greek debt lowered to junk status. FULL STORY
They were smooth, confident and proved why Goldman employees are known as the best on Wall Street. They explained complex mortgage products and their role in them. It was all very impressive — until the questions started. FULL STORY
My Note –
The other thing that I noticed about the ways that products on Wall Street have been made that profit only when others fail or when loans fail or when the markets are failing or when businesses fail – is this –
That same money which was drawn into that game would’ve otherwise been the same money to invest in the success of businesses, the underwriting of real innovations, research and develop of businesses, start-ups of new businesses and other types of investments which would’ve provided a return at the success of where it was made available.
The tragedy of having brought that money into a game based on making money when failure occurs – it also assured those funds weren’t available to support commercial real estate, retailers, manufacturers, businesses, startups and other truly innovative business and economic things of an advantage to our society. All that money has been tied up in this game to steal it, convert it into bonuses and Wall Street profits to serve themselves and making 100% return to themselves specifically because tens of thousands of people lost their homes and businesses.
Tell the people of Iceland who lost their life savings and all the revenues of their city budgets, their school’s program budgets, their country treasury, their banks and countless businesses – that the money in the pockets of the Wall Street members who sold them those financial products and also made off their banks’ failure wasn’t constructed intentionally to do so.
Ask the people of Greece, Portugal, Ireland, and countless others if there is nothing wrong with what Goldman Sachs, and every other Wall Street banker, investment firm and hedge fund have been and are still doing.
Some theories hold that the practice was invented in 1609 by Dutch trader Isaac Le Maire, a big shareholder of the Vereenigde Oostindische Compagnie (VOC). In 1602, he invested about 85,000 guilders in the VOC. By 1609, the VOC still was not paying dividend, and Le Maire’s ships on the Baltic routes were under constant threats of attack by English ships due to trading conflicts between the British and the VOC. Le Maire decided to sell his shares and sold even more than he had. The notables spoke of an outrageous act and this led to the first real stock exchange regulations: a ban on short selling. The ban was revoked a couple of years later.
Short selling has been a target of ire since at least the eighteenth century when England banned it outright. It was perceived as a magnifying effect in the violent downturn in the Dutch tulip market in the seventeenth century. In another well-referenced example, George Soros became notorious for “breaking the Bank of England” on Black Wednesday of 1992, when he sold short more than $10 billion worth of pounds sterling.
The term “short” was in use from at least the mid-nineteenth century. It is commonly understood that “short” is used because the short seller is in a deficit position with his brokerage house. Jacob Little was known as The Great Bear of Wall Street who began shorting stocks in the United States in 1822.
Short sellers were blamed for the Wall Street Crash of 1929. Regulations governing short selling were implemented in the United States in 1929 and in 1940. Political fallout from the 1929 crash led Congress to enact a law banning short sellers from selling shares during a downtick; this was known as the uptick rule, and this was in effect until July 3, 2007 when it was removed by the SEC (SEC Release No. 34-55970). President Herbert Hoover condemned short sellers and even J. Edgar Hoover said he would investigate short sellers for their role in prolonging the Depression. Legislation introduced in 1940 banned mutual funds from short selling (this law was lifted in 1997). A few years later, in 1949, Alfred Winslow Jones founded a fund (that was unregulated) that bought stocks while selling other stocks short, hence hedging some of the market risk, and the hedge fund was born.
Some typical examples of mass short-selling activity are during “bubbles“, such as the Dot-com bubble. At such periods, short-sellers sell hoping for a market correction. Food and Drug Administration (FDA) announcements approving a drug often cause the market to react irrationally due to media attention; short sellers use the opportunity to sell into the buying frenzy and wait for the exaggerated reaction to subside before covering their position. Negative news, such as litigation against a company, will also entice professional traders to sell the stock short.
During the Dot-com bubble, shorting a start-up company could backfire since it could be taken over at a higher price than what speculators shorted. Short-sellers were forced to cover their positions at acquisition prices, while in many cases the firm often overpaid for the start-up.
Short selling restrictions in 2008
In September 2008 short selling was seen as a contributing factor to undesirable market volatility and subsequently was prohibited by the U.S. Securities and Exchange Commission (SEC) for 799 financial companies for three weeks in an effort to stabilize those companies. At the same time the U.K. Financial Services Authority (FSA) prohibited short selling for 32 financial companies. On September 22, Australia enacted even more extensive measures with a total ban of short selling. Also on September 22, the Spanish market regulator, CNMV, required investors to notify it of any short positions in financial institutions, if they exceed 0.25% of a company’s share capital. Naked shorting was also restricted.
In an interview with the Washington Post in late December 2008, U.S. Securities and Exchange Commission Chairman Christopher Cox said the decision to impose a three-week ban on short selling of financial company stocks was taken reluctantly, but that the view at the time, including from Treasury Secretary Henry M. Paulson and Federal Reserve chairman Ben S. Bernanke, was that “if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save.” Later he changed his mind and thought the ban unproductive. In a December 2008 interview with Reuters, he explained that the SEC’s Office of Economic Analysis was still evaluating data from the temporary ban, and that preliminary findings point to several unintended market consequences and side effects. “While the actual effects of this temporary action will not be fully understood for many more months, if not years,” he said, “knowing what we know now, I believe on balance the Commission would not do it again.”
Short selling stock consists of the following:
- The investor instructs the broker to sell the shares and the proceeds are credited to his broker’s account at the firm upon which the firm can earn interest. Generally, the short seller does not earn interest on the short proceeds.
- Upon completion of the sale, the investor has 3 days (in the US) to borrow the shares. If required by law, the investor first ensures that cash or equity is on deposit with his brokerage firm as collateral for the initial short margin requirement. Some short sellers, mainly firms and hedge funds, participate in the practice of naked short selling, where the shorted shares are not borrowed or delivered.
- The investor may close the position by buying back the shares (called covering). If the price has dropped, he makes a profit. If the stock advanced, he takes a loss.
- Finally, the investor may return the shares to the lender or stay short indefinitely.
- At any time, the lender may call for the return of his shares e.g. because he wants to sell them. The borrower must buy shares on the market and return them to the lender (or he must borrow the shares from elsewhere). When the broker completes this transaction automatically, it is called a ‘buy-in’.
Shorting stock in the U.S.
In the U.S., in order to sell stocks short, the seller must arrange for a broker-dealer to confirm that it is able to make delivery of the shorted securities. This is referred to as a “locate.” Brokers have a variety of means to borrow stocks in order to facilitate locates and make good delivery of the shorted security.
The vast majority of stocks borrowed by U.S. brokers come from loans made by the leading custody banks and fund management companies (see list below). Institutions often lend out their shares in order to earn a little extra money on their investments. These institutional loans are usually arranged by the custodian who holds the securities for the institution. In an institutional stock loan, the borrower puts up cash collateral, typically 102% of the value of the stock. The cash collateral is then invested by the lender, who often rebates part of the interest to the borrower. The interest that is kept by the lender is the compensation to the lender for the stock loan.
Brokerage firms can also borrow stocks from the accounts of their own customers. Typical margin account agreements give brokerage firms the right to borrow customer shares without notifying the customer. In general, brokerage accounts are only allowed to lend shares from accounts for which customers have “debit balances”, meaning they have borrowed from the account. SEC Rule 15c3-3 imposes such severe restrictions on the lending of shares from cash accounts or excess margin (fully paid for) shares from margin accounts that most brokerage firms do not bother except in rare circumstances. (These restrictions include the broker must have the express permission of the customer and provide collateral or a letter of credit.)
Most brokers will allow retail customers to borrow shares to short a stock only if one of their own customers has purchased the stock on margin. Brokers will go through the “locate” process outside their own firm to obtain borrowed shares from other brokers only for their large institutional customers.
Dividends and voting rights
Where shares have been shorted and the company which issues the shares distributes a dividend, the question arises as to who receives the dividend. The new buyer of the shares, who is the “holder of record” and holds the shares outright, will receive the dividend from the company. However, the lender, who may hold its shares in a margin account with a prime broker and is unlikely to be aware that these particular shares are being lent out for shorting, also expects to receive a dividend. The short seller will therefore pay to the lender an amount equal to the dividend in order to compensate, though as this payment does not come from the company it is not technically a dividend as such. The short seller is therefore said to be “short the dividend”.
A similar issue comes up with the voting rights attached to the shorted shares. Unlike a dividend, voting rights cannot legally be synthesized and so the buyer of the shorted share, as the holder of record, controls the voting rights. The owner of a margin account from which the shares were lent will have agreed in advance to relinquish voting rights to shares during the period of any short sale. As noted earlier, victims of Naked Shorting attacks sometimes report that the number of votes cast is greater than the number of shares issued by the company.
As noted earlier, victims of Naked Shorting attacks sometimes report that the number of votes cast is greater than the number of shares issued by the company.
RBS’s aggressive expansion strategy turned the regional Scottish lender into a global bank with a large investment operation. But it backfired.
By the fall of 2008 RBS, one of Britain’s biggest banks, had been nationalized in all but name. The government started with a minority holding that fall, when it pulled the bank from the brink of collapse, but continued to tighten its grip as the share price eroded. By February 2009 it owned a 68 percent stake, allowing it to exert de facto control over bank management — which was replaced in a shake-up — as well as in lending and strategic decisions.
In the last week of February, the bank announced a £24.1 billion loss for the year, the largest in British corporate history. The bank has become the first bank to sign up for Britain’s asset protection plan. RBS said it would dump £325 ($466 billion) of mainly toxic assets into the program, a step that could raise the state’s stake to 95 percent.
A Routine Deal Became an $840 Million Mistake
Published: April 22, 2010
LONDON — To the bankers here, it seemed like a chance to make a quick $7 million — risk free.
Instead, their sweet deal turned into a $840.1 million debacle.
In May 2007, a handful of bankers in London agreed to take a role in a complex mortgage investment being devised by Goldman Sachs.
Abacus, which is now at the center of accusations that Goldman defrauded investors, was one of countless mortgage deals that ricocheted between Wall Street and Europe during the heady days of the boom.
Indeed, after R.B.S., the biggest loser in Abacus was IKB Deutsche Industriebank of Germany, which was a big player in such mortgage investments.
( . . . )
The $840.1 million that Abacus cost R.B.S. represented a small part of the crippling losses that led the British government to rescue the bank in the costliest bailout of any bank worldwide. Today R.B.S. is all but nationalized; the British government owns about 84 percent of it.
When the Abacus investment soured, Royal Bank of Scotland, under the terms of the deal, was obligated to cover the $840.1 million in losses. The British bank paid that sum to Goldman Sachs, which, in turn, paid John A. Paulson, the hedge fund manager who had bet against the deal. According to the Securities and Exchange Commission, Goldman had devised the investment to fail from the start so that Mr. Paulson could wager against it.
Muckety Map of John Paulson –
A passenger waited for a train at the Rossio station in Lisbon as transport workers in both Portugal and Greece went on strike against austerity measures on Tuesday.
By JACK EWING and JACK HEALY
Published: April 27, 2010
FRANKFURT — Greece’s credit rating was lowered to junk status Tuesday by a leading credit agency, a decision that rocked financial markets and deepened fears that a debt crisis in Europe could spiral out of control.
The ratings agency, Standard & Poor’s, downgraded Greece’s long-term and short-term debt to non-investment status and cautioned that investors who bought Greek bonds faced dwindling odds of getting their money back if Greece defaulted or went through a debt restructuring. The move came shortly after S.&P. reduced Portugal’s credit rating and warned that more downgrades were possible.
(etc. – and now the investment funds that may be holding that debt will probably have to dump it because its now called, “junk” along with the mega-interest rates and fees that Greece is paying on it regardless, and the credit default swaps will all be paid out to the bondholders and hedge funds, the investment firms and inside players at 100% on the dollar from whoever is holding those – it is obscene.)
“This is a signal to the markets that the situation is deteriorating rapidly, and it’s not clear who’s in a position to stop the Greeks from going into a default situation,” said Edward Yardeni, president of Yardeni Research. “That creates a spillover effect into Portugal and Spain and raises the whole sovereign debt issue.”
( . . . )
My Note – there is no Wall Street reform that is going to fix this. Something else is required to fix this, probably taking all the money from the Wall Street players and freezing their accounts to teach them the meaning of the term – ZERO. Al Capone had to be taught the meaning of the word Zero and so should it be explained to them. Freeze their accounts, their company accounts and their personal accounts – stop the process by which they have gained at the expense of the funds they stole from every individual across the US and in every country it has affected.
Those funds did not belong to them. They weren’t playing with their own money. They probably borrowed the $7 million dollars to pay for the credit default swap bought from RBS which required the depositors, investors and citizens of the United Kingdom and the United States to pay out $840 million (and no telling how much more on the same deal to other players involved. – John Paulson made $1 Billion dollars on the deal – how did he come up with that much money on it? Whose life savings was that he put in his pocket? How many children’s educations did he divert to put those profits into his own bank account? Did he ever do anything to earn it or did he do no more than find a sophisticated way to convert other people’s money into his own?)
– cricketdiane note, 04-28-10
Apr 18, 2010 … John Paulson made $3.7 billion in 2007, $2 billion in 2008. He made $2.3 billion last year to . . .
John A. Paulson
John A. Paulson current relationships:
John A. Paulson past relationships:
Comments and suggestions:
If you’re providing information or a photograph about John A. Paulson that you would like us to include in the Muckety database, please cite the source.
George Bailey’s desperate efforts to avoid the collapse of Bailey’s Savings & Loan have a special resonance this Christmas.
The number of U.S. bank failures in 2009 has reached 140, the highest number in 17 years. Many experts, including FDIC Chair Sheila Bair, predict that the number will increase next year.
While the FDIC risks losing millions on each failure, investors with cash reserves are seizing opportunities.
The most recent batch of takeovers involved some prominent names: billionaires J. Christopher Flowers, John Paulson and George Soros, Texas banker D. Andrew Beal and Steven T. Mnuchin, head of Dune Capital Management.
( . . . )
Flowers, Paulson and Soros invested with Mnuchin in OneWest Bank, which bought IndyMac bank earlier this year. Last week, the firm bought the failed First Federal Bank of California.
My Note –
So, Mr. Paulson was a managing director at Bear Stearns –
Bear Stearns Companies Inc. – managing director
and now owns IndyMac bank – and First Federal Bank of California
Here is a little more of an overall look at the bigger picture –
- Candidates follow the money – to hedge fund billionaires – April 23, 2008
- WaMu seized by federal regulators, sold to JPMorgan Chase – September 26, 2008
- Citigroup to buy Wachovia’s banking assets – September 29, 2008
- Feds help a family business – Great Southern Bancorp – December 11, 2009
- Mortgage crisis helped John Paulson reap $3.7 billion – April 17, 2008
- Top hedge funders make a big comeback – April 1, 2010
- Bank of America’s Ken Lewis battles for job – April 28, 2009
- Math whiz James Simons scores top spot on Alpha’s list – March 26, 2009
Paulson & Company
muckety map – see this page and roll over names below map
Paulson & Company
People related to Paulson & Company:
Other current Paulson & Company relationships:
Paulson & Company past relationships:
A record number of hedge funds liquidated in 2008
Philadelphia Business Journal – by Gregg Barr Special to the Business Journal
Hedge fund industry consolidation continued through the end of 2008, with a record number of hedge funds liquidating in the fourth quarter, according to a study from Hedge Fund Research Inc. released in March.
During the fourth quarter, investors withdrew a record amount of just over $150 billion from hedge funds, and 778 funds liquidated during the period, more than doubling the previous quarterly record of 344, set in the third quarter.
The total number of liquidations in 2008 was 1,471, an increase of more than 70 percent from the previous record of 848 liquidations in 2005.
- Despite substantial transition across the brokerage industry, the top three prime brokerage firms continue to control more than 62 percent of industry capital;
- More than 275 funds of hedge funds were liquidated in 2008, also a record;
- On a net basis, the total number of hedge funds declined by about 8 percent in 2008, to 9,284.
In most jurisdictions hedge funds are open only to a limited range of professional or wealthy investors who meet certain criteria set by regulators but, in exchange, hedge funds are exempt from many regulations that govern ordinary investment funds. The regulations thus exempted typically include restrictions on short selling, the use of derivatives and leverage, fee structures, and on the liquidity of interests in the fund. Light regulation and performance fees are the distinguishing characteristics of hedge funds.
The net asset value of a hedge fund can run into many billions of dollars, and the gross assets of the fund will usually be higher still due to leverage. Hedge funds dominate certain specialty markets such as trading within derivatives with high-yield ratings and distressed debt.
( . . . )
- Leverage – in addition to money invested into the fund by investors, a hedge fund will typically borrow money or trade on margin, with certain funds borrowing sums many times greater than the initial investment. If a hedge fund has borrowed $9 for every $1 received from investors, a loss of only 10% of the value of the investments of the hedge fund will wipe out 100% of the value of the investor’s stake in the fund, once the creditors have called in their loans. In September 1998, shortly before its collapse, Long-Term Capital Management had $125 billion of assets on a base of $4 billion of investors’ money, a leverage of over 30 times. It also had off-balance sheet positions with a notional value of approximately $1 trillion.
- Lack of transparency – hedge funds are private entities with few public disclosure requirements. It can therefore be difficult for an investor to assess trading strategies, diversification of the portfolio, and other factors relevant to an investment decision.
- Lack of regulation – hedge fund managers are, in some jurisdictions, not subject to as much oversight from financial regulators as regulated funds, and therefore some may carry undisclosed structural risks.
Federal investigators have identified 41 foreign companies helping Iran to develop its energy capacity.
Hedge fund structure
A hedge fund is a vehicle for holding and investing the money of its investors. The fund itself has no employees and no assets other than its investment portfolio and cash. The portfolio is managed by the investment manager, which is the actual business and has employees.
As well as the investment manager, the functions of a hedge fund are delegated to a number of other service providers. The most common service providers are:
- Prime broker – prime brokerage services include lending money, acting as counterparty to derivative contracts, lending securities for the purpose of short selling, trade execution, clearing and settlement. Many prime brokers also provide custody services. Prime brokers are typically parts of large investment banks.
- Administrator – the administrator typically deals with the issue and redemption of interests and shares, calculates the net asset value of the fund, and performs related back office functions. In some funds, particularly in the U.S., some of these functions are performed by the investment manager, a practice that gives rise to a potential conflict of interest inherent in having the investment manager both determine the NAV and benefit from its increase through performance fees. Outside of the U.S., regulations often require this role to be taken by a third party.
- Distributor – the distributor is responsible for marketing the fund to potential investors. Frequently, this role is taken by the investment manager.
The legal structure of a specific hedge fund – in particular its domicile and the type of legal entity used – is usually determined by the tax environment of the fund’s expected investors. Regulatory considerations will also play a role. Many hedge funds are established in offshore financial centres so that the fund can avoid paying tax on the increase in the value of its portfolio. An investor will still pay tax on any profit it makes when it realizes its investment, and the investment manager, usually based in a major financial centre, will pay tax on the fees that it receives for managing the fund.
Around 60% of the number of hedge funds in 2009 were registered in offshore locations. The Cayman Islands was the most popular registration location and accounted for 39% of the number of global hedge funds. It was followed by Delaware (US) 27%, British Virgin Islands 7% and Bermuda 5%. Around 5% of global hedge funds are registered in the EU, primarily in Ireland and Luxembourg. 
Investment manager locations
In contrast to the funds themselves, investment managers are primarily located onshore in order to draw on the major pools of financial talent and to be close to investors. With the bulk of hedge fund investment coming from the U.S. East coast – principally New York City and the Gold Coast area of Connecticut – this has become the leading location for hedge fund managers. It was estimated there were 7,000 investment managers in the United States in 2004.
London is Europe’s leading centre for hedge fund managers, with three-quarters of European hedge fund investments, about $400 billion, at the end of 2009. Asia, and more particularly China, is taking on a more important role as a source of funds for the global hedge fund industry. The UK and the U.S. are leading locations for management of Asian hedge funds’ assets with around a quarter of the total each.
Although hedge funds are investment companies, they have avoided the typical regulations for investment companies because of exceptions in the laws. The two major exemptions are set forth in Sections 3(c)1 and 3(c)7 of the Investment Company Act of 1940. Those exemptions are for funds with 100 or fewer investors (a “3(c) 1 Fund”) and funds where the investors are “qualified purchasers” (a “3(c) 7 Fund”). A qualified purchaser is an individual with over US$5,000,000 in investment assets. (Some institutional investors also qualify as accredited investors or qualified purchasers.) A 3(c)1 Fund cannot have more than 100 investors, while a 3(c)7 Fund can have an unlimited number of investors. The Securities Act of 1933 disclosure requirements apply only if the company seeks funds from the general public, and the quarterly reporting requirements of the Securities Exchange Act of 1934 are only required if the fund has more than 499 investors. A 3(c)7 fund with more than 499 investors must register its securities with the SEC.
In order to comply with 3(c)(1) or 3(c)(7), hedge funds raise capital via private placement under the Securities Act of 1933, and normally the shares sold do not have to be registered under Regulation D. Although it is possible to have non-accredited investors in a hedge fund, the exemptions under the Investment Company Act, combined with the restrictions contained in Regulation D, effectively require hedge funds to be offered solely to accredited investors. An accredited investor is an individual person with a minimum net worth of $1,000,000 or, alternatively, a minimum income of US$200,000 in each of the last two years and a reasonable expectation of reaching the same income level in the current year. For banks and corporate entities, the minimum net worth is $5,000,000 in invested assets.
In December 2004, the SEC issued a rule change that required most hedge fund advisers to register with the SEC by February 1, 2006, as investment advisers under the Investment Advisers Act. The requirement, with minor exceptions, applied to firms managing in excess of US$25,000,000 with over 14 investors. The SEC stated that it was adopting a “risk-based approach” to monitoring hedge funds as part of its evolving regulatory regimen for the burgeoning industry. The new rule was controversial, with two commissioners dissenting. The rule change was challenged in court by a hedge fund manager, and, in June 2006, the U.S. Court of Appeals for the District of Columbia overturned it and sent it back to the agency to be reviewed. See Goldstein v. SEC. In response to the court decision, in 2007 the SEC adopted Rule 206(4)-8. Rule 206(4)-8, unlike the earlier challenged rule, “does not impose additional filing, reporting or disclosure obligations” but does potentially increase “the risk of enforcement action” for negligent or fraudulent activity.
In February 2007, the President’s Working Group on Financial Markets rejected further regulation of hedge funds and said that the industry should instead follow voluntary guidelines. In November 2009 the House Financial Services Committee passed a bill that would allow states to oversee hedge funds and other investment advisors with $100m or less in assets under management, leaving larger investment managers up to the Securities and Exchange Commission. Because the SEC currently regulates advisers with $25m or more under management, the bill would shift 43% of these companies, or roughly 710, back over to state oversight
Comparison to private equity funds
Hedge funds are similar to private equity funds in many respects. Both are lightly regulated, private pools of capital that invest in securities and compensate their managers with a share of the fund’s profits. Most hedge funds invest in relatively liquid assets, and permit investors to enter or leave the fund, perhaps requiring some months notice. Private equity funds invest primarily in very illiquid assets such as early-stage companies and so investors are “locked in” for the entire term of the fund. Hedge funds often invest in private equity companies’ acquisition funds.
Between 2004 and February 2006, some hedge funds adopted 25-month lock-up rules expressly to exempt themselves from the SEC’s new registration requirements and cause them to fall under the registration exemption that had been intended to exempt private equity funds.
(from wikipedia hedge funds entry)
Hedge funds came under heightened scrutiny as a result of the failure of Long-Term Capital Management (LTCM) in 1998, which necessitated a bailout coordinated (but not financed) by the U.S. Federal Reserve. Critics have charged that hedge funds pose systemic risks highlighted by the LTCM disaster. The excessive leverage (through derivatives) that can be used by hedge funds to achieve their return is outlined as one of the main factors of the hedge funds’ contribution to systemic risk.
The ECB (European Central Bank) issued a warning in June 2006 on hedge fund risk for financial stability and systemic risk: “… the increasingly similar positioning of individual hedge funds within broad hedge fund investment strategies is another major risk for financial stability, which warrants close monitoring despite the essential lack of any possible remedies. Some believe that broad hedge fund investment strategies have also become increasingly correlated, thereby further increasing the potential adverse effects of disorderly exits from crowded trades.” However the ECB statement has been disputed by parts of the financial industry.
The potential for systemic risk was highlighted by the near-collapse of two Bear Stearns hedge funds in June 2007. The funds invested in mortgage-backed securities. The funds’ financial problems necessitated an infusion of cash into one of the funds from Bear Stearns but no outside assistance. It was the largest fund bailout since Long Term Capital Management’s collapse in 1998. The U.S. Securities and Exchange commission is investigating.
However, hedge funds played almost no role in the vastly greater 2008 banking crisis. (interesting opinion statement in the wikipedia entry but not true – check the news from the hearings in the Congress and in the media at the time, my note)
Paulson, the founder and president of the hedge fund Paulson & Company, made $3.7 billion in 2007, according to an annual listing of the 50 most highly paid hedge fund managers.
The list compiled by Institutional Investor’s Alpha Magazine was previewed on the magazine’s website yesterday.
Paulson acquired his money by betting against the subprime mortgage market, using a complicated system that increased his earnings as the value of financial instruments bundling the mortgages dropped.
In other words, as the world got poorer, Paulson got richer.
He was by no means alone.
The list of top managers shows four other billion-dollar earners.
Philip Falcone of Harbinger Capital Partners earned $1.7 billion and Kenneth Griffin of Citadel Investment Group came away with $1.5 billion.
The Wall Street Journal wrote in January that Paulson had told friends he was going to increase his charitable giving to help those in need.
In October 2007, he donated $15 million to the Center for Responsible Lending. That money was to help families about to lose their mortgages.
( . . . )
By the end of last year (2007), the firm had $28 billion in assets, an increase in $22 billion from the previous year, the Times reported.
In 1994, Paulson started Paulson & Co. with $2 million.