Sunday, July 15, 2012

China to Allow Foreign Hedge Funds to Operate in the Country

These People Just Have No Idea What Communism Means

One of the more odious parts of an unregulated financial system are what are called Hedge Funds.  These funds solicit large investments from very wealthy people and from large institutions like pension funds and create complex investments that generally return only a small return to the investors but a large return to the sponsors.  They serve no real economic purpose except to enrich a tiny number of people, most of whom then use that money to lead a lavish life style and promote Conservative causes.

China proudly proclaims itself to be a Communist country, but more and more that nation is evolving into another capitalist society.  To the extent this creates rapid economic growth, and strong middle class and prosperity for tens of millions of people who would otherwise languish in poverty, the capitalist tendencies of China is a good thing.

But China is also creating a small cadre of very wealthy people, and it is starting to import the excessives of the very wealthy.  It has just announced that it will allow foreign Hedge Funds to operate in the country.

The reform, called the Qualified Domestic Limited Partner programme, invites hedge funds to apply for licenses to register in Shanghai, two people said. One person said that only the world’s biggest hedge funds, with at least $10bn assets under management, would be allowed to participate at first.

Laurie Pinto, chief executive of North Square Blue Oak, a London-based investment bank that focuses on China, said that hedge funds were already queueing up to apply for licenses, even though the programme had not been formally announced.

“There’s an amazing distribution potential in China and an amazing need for this product,” he said. “Everyone wants to be in this, but it’s complicated and it’s China.”

Of course “everyone” does not include the vast majority of the population of China, where the average income is still only a few thousand dollars a year.  And yes China will now have to learn how greedy fund managers rake in huge profits while leaving most (but not all) investors with meager returns over the long term.  (Yes, we are talking about you John Paulson).

John Paulson's Very Bad Year
Photograph by Mike McGregor/Contour by Getty Images


John Paulson's Very Bad Year

After his success in 2007, the amount of money in his funds grew to more than $30 billion. Things went swimmingly until 2011 came along. His two largest funds, Paulson Advantage and Advantage Plus, lost 36 percent and 52 percent that year, and the red streak has continued into 2012, with Advantage and Advantage Plus down 6.3 percent and 9.3 percent as of the end of May.

But that’s apparently a difficult lesson to learn;  most investors in the West have still not caught on.  Hopefully the Chinese will be a little bit smarter. 

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