Thursday, 17 December 2009

Robbing Hood

I've never been a great fan of hedge funds. Buying things they don't want using other peoples' money and selling things they don't own in order to redistribute wealth from the many to the few has never struck me as being either a socially valuable activity, or a sound basis for an economy.

I've taken more interest since it became clear that these funds are donating large sums to the Tory party nationally, and that one of them is almost entirely funding the Tory campaign in this constituency.

Many people, myself included, have long harboured doubts that the people involved in some of the more complex financial instruments do not themselves fully understand the nature of those instruments, let alone the risks involved. If they were only working on the fringes of the financial system -- and if they were the only people taking those unquantified risks -- it might not matter. But it does matter -- firstly because their habit of shortselling directly contributed to the financial collapse, and secondly because it became clear that it was us, rather than them, who were taking the risks.

Wrecsam Plaid drew attention a few days ago to the massive payment being made to one hedge fund manager who admits that he made a great deal by short-selling the banks, including Bradford and Bingley. It seems that the people behind funds like this will completely escape the additional tax which is being imposed on bankers' bonuses.

Thee are two reasons for that. The first is, as Wrecsam Plaid points out, that they are not, in the strict sense of the word, 'bankers'. (Although some people may still consider them to be 'merchants'.) The second is that this company operates as a Limited Liability Partnership rather than as a limited company, as do a number of other hedge funds.

LLPs pay no corporation tax at all on their profits. Instead the profit made by the LLP (as opposed to the growth in the assets managed) is treated as the personal property of the partners, who can take it out of the partnership any time they want. And, whilst I don't know the details of the tax status of the particular company involved here, in most cases with companies like this the profits extracted are treated as coming from the purchase and sale of assets rather than as income - so they are subject to capital gains tax rather than income tax. This is an extremely beneficial arrangement - for those involved. It means, in effect, that they can pay themselves millions, but pay tax at a lower rate than the office cleaning staff.

Hedge funds do make some people wealthy, but they don't generate wealth, as some of them claim. The two things are quite different. They actually redistribute wealth - to themselves. They perform no useful function for the many, and the sooner they are closed down the better.

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