Now consider this ludicrous factoid - according to this interview with John Bogle, the cumulative value of all stock transactions in one year is $40 trillion !!! To put that in perspective, that is roughly 6 times the value of the stock market itself i.e. when you add up all of the transactions, the entire market turns over 6 times per year. Or put it this way, it's about 200 times the amount of *new* equity capital raised for companies. In other words one part real value to the economy, v.s. 199 parts of pure speculation.
And it's all just a zero sum game. As Bogle points out in the above article, not one dollar of added value to the economy from all of that speculation. Average pay on Wall Street is still ~$140k , which is 3x what the average family makes in the U.S. And that $140k average masks huge deviations between secretaries and admin workers making well under the average v.s. many "top" traders making several million dollars a year.
And as the same article points out, all of that money attracts the nation's "top talent" from the best schools to go to Wall Street to trade pieces of paper back and forth with each other - extracting millions of dollars in bonuses (each), for absolutely zero economic benefit.
Hedge funds have other treats and delights not available to us average citizens. Carried interest is the special tax treatment by which hedge fund managers pay half the tax rate as all other professionals (i.e. 20% v.s. 40%). Carried interest is just a fancy term for meaning treating income as capital gains, even though its still paid out on an annual basis. "Soft dollars" are the industry's other dirty little secret. Most hedge funds operate under the "2 and 20" model which means they take 2% fee of total asset value and 20% of the profits. The 2% is supposed to cover the fund's operating costs while the 20% is the incentive fee. As if this arrangement is not already lucrative enough, many hedge funds, particularly the larger ones have found a way of turning the 2% (which on $1 billion is $20 million) into part of their incentive bonus. What they do, is run their expenses through their broker (Goldman Sachs/Morgan Stanley). Goldman then charges the fund back by plumping up the stock trading commissions it charges the hedge fund. These commissions are paid directly from the fund itself, bypassing the 2/20 structure i.e. it's a highly profitable scheme. Next, you have the fact that most hedge funds are incorporated outside of the U.S. in tax havens like the Cayman Islands, Bermuda, Bahamas etc. I am not a tax lawyer, but I assume there is some advantage from that strategy...
And I have no doubt that when the Idiocracy eventually wakes up from its semi-lucid coma and goes bonkers once again, that all of these rent seeking shenanigans will be duly scrutinized. Of course, it will be a day late and many dollars short. Even now, I hear people every day questioning the Occupy Wall Street movement - "what do they want?" "what's their goal?". All these skeptics still have their jobs obviously so to them, OWS is just an inconvenient nuisance to be trivialized. Yet, not one of these skeptical morons could go two weeks sans pay check without being bankrupt. Meaning, as they say, every dog will have its day...
As I have said before and as the Paulson example illustrates, hedge funds are just very large call options on the U.S. economy, as in - heads, I win - tails, I walk away, leaving the fund's investors holding the bag. No one (least me) is going to cry about a bunch of 1%ers losing billions to a hedge fund, but as usual, the cost of these "call options" (aka. hedge funds) all collapsing at the same time, will once again be borne across the entire (real) economy.
It's no secret that most of these hedge funds are basically following the same general strategy of either "risk on" or "risk off" which has led to the highest risk asset correlations in decades; therefore, it's only a question of time before the herd panics and heads straight for the cliff.
