Man, I wish the poor would stop whining...Follow

No, you didn't. As I pointed out earlier. No more money leaves the table then was there when you started. That's not the case over time with investments.

And yes. I'm aware that some capital gains are made on a buy/sell basis and also don't represent an increase in total capital in the economy. The key difference (again!), is that the overall result of that investment *does* increase the total size of the pie over time. No matter how many years you and 5 other people play poker, you'll never increase the total amount of money at the table. Ever.


Get it? Completely different things.



No. By definition hedge funds are funds that are allowed to use a wider range of tactics with the money they manage. That's it. While the traditional hedge fund (and the source of the name) is about minimizing risk, that is not the totality of what a hedge fund can be. Today, many are about maximizing short term return, and *not* minimizing risk.




You're using an outdated assumed definition for the term "hedge fund". That's not the entirety of the definition. That's one type of hedge fund...


But semantics aside, you're still missing the point. Let's say a hedge fund exists specifically to make money on short term market panics (like the Soros example). You start with some stock (or a whole group of stocks) that's worth say $50/share today. You wait for a panic moment (or cause one if we want to use our tinfoil hats). In a few hours, the value drops to $40/share. You use the massive amounts of liquid assets in the fund to gobble 10 million shares at that price, because you know that this is just a short term dip. The very fact that you've done this shores up the price and it rebounds up to $48/share. You then sell it (possibly to the same funds that sold it a few hours earlier). Net profit for one day: 80 million dollars. You then sit there with your mass of cash waiting for the next panic event to occur...


What just happened? Well. In reality, nothing. Ok. The shares are now worth $2/share less, but let's assume they recover that over the next week or so and everything goes back to normal. Here's the deal. You want to tax that as income. And perhaps you have a point, since you've correctly noted that no actual "value" was added. Here's the problem though. No actual taxes were generated either. But wait! you say... What about the taxes on the 80 million dollars?! Sure. But what about the taxes that will now not be paid on the 100 million dollars of loss that occurred first? It's a wash. In fact, after the value bounces back, net taxes on that "dip" is.... zero.


See. While you can point to any individual instance of capital gains and say: "He didn't do anything positive for the economy", if you look at investment as a whole, you'll quickly realize that taxes gained from capital gains is only positive if the total gains exceed the total losses. Thus, while there may be many predatory buys and sells, from a public gain point of view, it mirrors exactly and *only* the degree of "gain" to the entire value of invested industry as a whole.


My point is that it's accurate to say that capital gains (as a whole) only occurs as a result of positive growth to the economy as a whole. While one person may gain during a loss, the net is still a loss (or a break even). Raising taxes on capital gains is equivalent to raising taxes on your own countries economic growth...

Edited, May 13th 2008 6:43pm by gbaji

Well. If we're going to use the original strict definition of a hedge fund, the "hedge" includes both long and short buys. The shorts are used to hedge the long in case the value continues to drop. There's some variation, but the idea is to find the correct ratio of long to short buys based on the expected performance of the stock. You're playing on the fact that longs can only lose X, and shorts can only gain X, where X is the current value of the stock (if the value goes down). However, shorts can lose infinite amounts and longs can gain infinite amounts, if the stock goes up. Um... You're going to typically have more long then short in a standard hedge for exactly that reason.


If we're being picky... But you're correct that they play on volatility to make money.




Ah. So you agree that the simplistic argument of "raising capital gains to equal income" isn't correct. If your problem is the predatory market tactics, how about we *not* push for some knee jerk idea that is the equivalent of tossing the baby out with the bathwater.

I'm quite sure I already said this earlier...



Um... I'll also point out {again!) that there's no tax gain from that process. The net tax effect from the government's perspective is zero (because every dollar of gain in a short is a loss for someone else). Did you just kinda miss that point? It should be pretty obvious that changing the tax rates is the wrong way to address this issue.

Um... I'll also point out {again!) that there's no tax gain from that process. The net tax effect from the government's perspective is zero (because every dollar of gain in a short is a loss for someone else). Did you just kinda miss that point? It should be pretty obvious that changing the tax rates is the wrong way to address this issue.

I don't follow you here. Of course there's a tax gain if you tax short plays at a higher rate. The loss in taxes from the capital loss is smaller than the gain from the taxation of the short profit if it's at a higher rate.

I'm not sure how you'd find taxing people literally betting against the US economy at a higher rate than those betting for it a bad idea.

Well. Technically, we do since shorts are always going to be short term capital gains

No.


(since the whole thing has to happen before a margin call comes in)

Please don't use phrases you don't understand. "margin call" for instance.

Thanks.

Since the only way to make money on a short is to borrow the shares (buying them washes out and doesn't work), there's always going to be a time issue involved before the shares have to change hands. Thus, they're always going to be short term capital gains on the transactions.

Hahaha, no. The cutting and pasting is funny, the complete lack of understanding is just sad.

Here's what a margin call is:

A demand for funds when you don't have enough collateral. That's it. If I deposit $1,000,000 in my margin account, and short sell 1000 shares of Intel at $25, I'd be issued a margin call if Intel went to $3000. There's no time frame involved. If it's obvious that I enough capital to cover the sale at the current price, a margin call will never be issued.

What you might be referring to is being "called away", (which in practice virtually never happens, we're talking 1 time in 100,000) which is a demand to cover your short because the brokerage has no other way to get shares. In modern markets, liquidity is such that this is almost impossible.

Tax regulations on straight short sales do consider the eventual profit to occur instantly on covering, and as such would be ineligeble for LTCG, but as I stated previously, I'm using a simple example for your sake. Fund managers aren't actually short selling stocks using stock, they're using derivatives with substantial tax advantages.

Can we cut through the BS now please? Capital gains only qualify for the lower tax rates if you buy a stock (or other investment), hold it for 18 months, and then sell it. Not borrow. Not short sell. In other words, all my talk about how the rate is a reward for "doing the right thing" with your money was spot on.

Hi. No. Ten seconds of research would tell you (or anyone) that this isn't the case.

I was avoiding referencing the actual structures, which you have no hope of understanding, so we could discuss this rationally.

Apparently you'd rather place your hands over your ears and scream than listen, which is hardly surprising, but has gotten old.

Here's the current tax code on some derivative instruments:

http://www.irs.ustreas.gov/pub/irs-pdf/p550.pdf

I know you won't understand it, but rather than completely ******* guessing as you are now, maybe give it a go and quote directly from it so I can stop wasting time explaining very, very, simple things to you.

Thanks.