By Pam Martens and Russ Martens: January 16, 2020 ~
It’s apparently not enough of a billionaire subsidy for the U.S. Treasury’s Internal Revenue Service to give a monster tax break to hedge fund titans by allowing them to pay Federal taxes on the basis of “carried interest,” meaning that they have a special loophole to pay a lower tax rate than many school teachers, nurses and plumbers. Now, according to an article in the Wall Street Journal, the Federal Reserve is actually considering opening its super-cheap repo loan money spigot to hedge funds. It doesn’t get any crazier than this.
Morphing from a central bank mandated to set monetary policy on the basis of maximum employment and stable prices, to the lender-of-last-resort to the criminally-charged trading houses on Wall Street and now, potentially, to the insider-trading/Big Short hedge funds, the New York Fed has totally lost its way if not its mind. (Unless, as many suspect, the New York Fed is simply the poorly-disguised money puppet of the one percent.)
The talk of a hedge fund bailout comes at a time when multiple hedge funds and illiquid mutual funds have locked their gates, preventing investors from getting back their money. It also comes after a year of giant net withdrawals from hedge funds. Equally noteworthy, in the past two years over 1200 hedge funds have shut down according to Hedge Fund Research.
According to a report at eVestment which tracks hedge fund flows, investors pulled $29.37 billion from hedge funds in the third quarter of last year, bringing the total net outflows through the third quarter to an eyebrow-raising $76.86 billion. eVestment subsequently reported that another $6.20 billion was pulled in October, bringing the year-to-date total to $83.06 billion.
Those outflows come on the heels of multiple hedge funds suspending withdrawals by investors. In the month of December 2019, York Capital Management and Southpaw Asset Management set up gates that prevent clients from getting all of the money they have requested to withdraw. The Wall Street Journal’s Juliet Chung reported as follows two days before Christmas:
“York, founded by Milwaukee Bucks co-owner Jamie Dinan, told clients in a letter Thursday it was suspending redemptions from its nearly $2 billion Credit Opportunities fund for the year-end period and that it planned to start unwinding the fund…The $1.2 billion Greenwich, Conn.-based Southpaw told clients in a letter earlier last week it plans to return 55% of the money they requested back for year-end. That figure doesn’t include money investors requested that the firm is tying up in a so-called ‘side pocket.’ ”
That scary news followed an equally troubling missive earlier in the year. On June 3 the $4.7 billion Woodford Equity Income Fund in the U.K. froze withdrawals by investors. The fund was slated to open for withdrawals in December but the U.K. regulator, the Financial Conduct Authority (FCA), announced in October that the fund will not reopen and will be liquidated instead. The FCA has an ongoing investigation into the matter. The problem, according to the FCA, is that the fund was holding illiquid and hard to price assets.
On December 4, the U.K. based M&G Property Portfolio announced it would suspend dealings, stating that it could not meet redemptions due to difficulty in selling commercial property. Investors had pulled an estimated $1.2 billion from the fund in the first 10 months of last year.
Just yesterday, the Korean hedge fund manager, Lime Asset Management, announced that it was suspending withdrawals from its various hedge funds that would impact $1.7 billion in assets. The hedge fund manager had reported earlier last year that it was halting withdrawals on $700 million of funds. The problem at Lime is also reported to be illiquid assets.
Supporting the idea that a spike in hedge fund withdrawals is partly responsible for the Fed restoring its cash feeding tube to Wall Street, the Financial Times reported on October 1 that the CFO of a “top-10 US bank” told it that “We have plenty of liquidity. We are just choosing not to lend it out overnight to hedge funds.”