HEDGE FUNDS ARE TRICKSEY

Before I begin, I don't think John McCain should be on the Senate Permanent Subcommittee on Investigations because he's ignorant & cranky.  This time he doesn't seem to have gummed up the investigation but that's probably only because he was re-elected in 2012. The leverage allowed under this scheme is clearly a threat to the general economy.

Senate Inquiry Faults Hedge Funds’ Tax Strategy
By ALEXANDRA STEVENSON
July 21, 2014 5:13 pm
NYT

“These banks and hedge funds involved in this case used dubious structured financial products in a giant game of ‘let’s pretend,’ costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation,” said Senator Carl Levin, the Michigan Democrat who is chairman of the Senate subcommittee.

The basket options under scrutiny were structured as accounts that allowed hedge funds to bypass taxes on short-term trades. Barclays and Deutsche Bank used the options to build special accounts for their hedge fund clients in their own names and claimed they owned the assets when it was, in fact, the hedge fund clients that exercised full control of the assets, determining each trade and reaping all the profits, the Senate investigation found.

The basket options were also structured to allow hedge funds to borrow greater amounts of money to trade, far exceeding the federal leverage limits for Wall Street firms that are broker-dealers; these limits were first enacted in the 1930s. Hedge funds, which are not regulated as broker-dealers are, borrow money to help amplify their returns.

Under the average brokerage account, investors are allowed to borrow only $1 for every $2 in the account. Within these complicated financial structures, Renaissance Technologies was able to borrow as much as $17 for every $1 in the account.