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How the SEC is enabling Wall Street's fungal creep into Main Street How the SEC is enabling Wall Street's fungal creep into Main Street
(2 months later)
For most people in the US, Wall Street is not an everyday concept. It's more like a haunted Victorian mansion on the edge of town where your 401(k) retirement plan lives: it takes a long time to understand how to get there and you're pretty sure something's not right about it, but you're too scared to get close enough to check.For most people in the US, Wall Street is not an everyday concept. It's more like a haunted Victorian mansion on the edge of town where your 401(k) retirement plan lives: it takes a long time to understand how to get there and you're pretty sure something's not right about it, but you're too scared to get close enough to check.
As you might expect, that's an illusion. Wall Street is in your backyard, where electrical lines give you light for your house: those energy companies raise money by selling bonds through the public markets. Wall Street is in your pipes, where water managed by municipal governments travels from reservoirs to your faucets; your city likely funds its sewers and water lines by selling bonds in auctions to big, billion-dollar investors. Wall Street is in your schools and roads (paid for by more bonds) and in your colleges (which invest your tuition money in everything from stocks to farmland, in the hopes of boosting their profits and their budgets).As you might expect, that's an illusion. Wall Street is in your backyard, where electrical lines give you light for your house: those energy companies raise money by selling bonds through the public markets. Wall Street is in your pipes, where water managed by municipal governments travels from reservoirs to your faucets; your city likely funds its sewers and water lines by selling bonds in auctions to big, billion-dollar investors. Wall Street is in your schools and roads (paid for by more bonds) and in your colleges (which invest your tuition money in everything from stocks to farmland, in the hopes of boosting their profits and their budgets).
Wall Street is in your bank account, charging you fees on your checking account; it's in your driveway, where your car sleeps as you pay off your auto loan – a debt that has already been sliced and diced and sold to a trader at a bank somewhere. Wall Street is in your house – which it probably owns a part of – and because the interest rate on your mortgage bill was likely set by 18 traders in London one day a few years back.Wall Street is in your bank account, charging you fees on your checking account; it's in your driveway, where your car sleeps as you pay off your auto loan – a debt that has already been sliced and diced and sold to a trader at a bank somewhere. Wall Street is in your house – which it probably owns a part of – and because the interest rate on your mortgage bill was likely set by 18 traders in London one day a few years back.
As a result, Wall Street is not so much like a haunted Victorian mansion as a quiet, creeping fungus right where you live: it grows fast and takes root everywhere, silently.As a result, Wall Street is not so much like a haunted Victorian mansion as a quiet, creeping fungus right where you live: it grows fast and takes root everywhere, silently.
But this has not been enough: even with all the ways Wall Street surrounds us, most of us never think about it. We think about our kids, our spouse, work, commuting, shopping for groceries, what political candidate to support. This variety of thought will not contribute any money to Wall Street's profits. That's why Wall Street wants to get closer to you. It wants its presence to be more obvious. It wants its financial spores to take root right in your brain. And the best way to do that is by advertising.But this has not been enough: even with all the ways Wall Street surrounds us, most of us never think about it. We think about our kids, our spouse, work, commuting, shopping for groceries, what political candidate to support. This variety of thought will not contribute any money to Wall Street's profits. That's why Wall Street wants to get closer to you. It wants its presence to be more obvious. It wants its financial spores to take root right in your brain. And the best way to do that is by advertising.
Just now, Wall Street won an important victory in that effort. An important barrier between the Street and regular investors fell: the Securities and Exchange Commission for the first time allowed hedge funds to advertise to regular people, including through direct-mail campaigns.Just now, Wall Street won an important victory in that effort. An important barrier between the Street and regular investors fell: the Securities and Exchange Commission for the first time allowed hedge funds to advertise to regular people, including through direct-mail campaigns.
Hedge funds, for those who are unfamiliar, are pools of money from institutions and (usually rich) people, who contribute their money to hedge-fund managers who deploy the dollars however they like: in stocks, in bonds, in Slovenian securities or Chinese companies.Hedge funds, for those who are unfamiliar, are pools of money from institutions and (usually rich) people, who contribute their money to hedge-fund managers who deploy the dollars however they like: in stocks, in bonds, in Slovenian securities or Chinese companies.
The new SEC policy is a radical departure from previous rules, which forced hedge funds to stay so far out of the consciousness of any regular investor that most of the funds didn't even have their own websites. The thinking behind that old rule was obvious: if Wall Street, with its sophistication, has direct access to the money of unsophisticated people, it will likely end in tears.The new SEC policy is a radical departure from previous rules, which forced hedge funds to stay so far out of the consciousness of any regular investor that most of the funds didn't even have their own websites. The thinking behind that old rule was obvious: if Wall Street, with its sophistication, has direct access to the money of unsophisticated people, it will likely end in tears.
Now, we have discarded that caution, perhaps unwisely. Hedge funds can show up on your doorstep, if they wish. They only have to limit their approaches to individual investors who are "accredited". That sounds exclusive, but it's not much protection.Now, we have discarded that caution, perhaps unwisely. Hedge funds can show up on your doorstep, if they wish. They only have to limit their approaches to individual investors who are "accredited". That sounds exclusive, but it's not much protection.
Right now, accredited means having a net worth of $1m or more, not counting the value of your home. In a bad economy that sounds rich, but actually it's not such rarified air to breathe any more: There are now about 9 million Americans in the United States who are millionaires; that's nearly even with the previous all-time record set in 2006.Right now, accredited means having a net worth of $1m or more, not counting the value of your home. In a bad economy that sounds rich, but actually it's not such rarified air to breathe any more: There are now about 9 million Americans in the United States who are millionaires; that's nearly even with the previous all-time record set in 2006.
A lot of this, however, is a false kind of wealth. People in the United States don't have any more money in their bank accounts. The net worth of a few people has risen simply because the stock market has done so well in recent years, boosting the value of their retirement accounts.
Many of those people are baby-boomers, which means they'll be able to cash in those accounts soon, if they haven't already. That means more ready money at hand, and some people will be looking to re-invest it. The wolves of Wall Street are ready.		A lot of this, however, is a false kind of wealth. People in the United States don't have any more money in their bank accounts. The net worth of a few people has risen simply because the stock market has done so well in recent years, boosting the value of their retirement accounts.
Many of those people are baby-boomers, which means they'll be able to cash in those accounts soon, if they haven't already. That means more ready money at hand, and some people will be looking to re-invest it. The wolves of Wall Street are ready.
But investors should be wary. Giving money to a hedge fund does not mean investors will make a profit; it doesn't even guarantee they'll ever see the money again. Hedge funds are, by their nature, risky. Anyone who gets the investing itch after cashing in a 401(k) should picture an entire retirement without that money. There are several reasons for this.But investors should be wary. Giving money to a hedge fund does not mean investors will make a profit; it doesn't even guarantee they'll ever see the money again. Hedge funds are, by their nature, risky. Anyone who gets the investing itch after cashing in a 401(k) should picture an entire retirement without that money. There are several reasons for this.
For one thing, there are the fees. Many hedge funds charge exorbitant fees, which pay the managers handsomely even if they don't increase your money by a cent. This is called the "two-and-twenty" fee structure: managers get 2% of all the assets in the fund for themselves regardless of whether they grow your money. And if they do make any profit on the investments, they get 20% of the riches, again for themselves.For one thing, there are the fees. Many hedge funds charge exorbitant fees, which pay the managers handsomely even if they don't increase your money by a cent. This is called the "two-and-twenty" fee structure: managers get 2% of all the assets in the fund for themselves regardless of whether they grow your money. And if they do make any profit on the investments, they get 20% of the riches, again for themselves.
For another thing, there are the returns. Plenty of hedge-fund managers just aren't that good at what they do: the vast majority, for all their fancy strategies, don't beat the S&P 500 index. Last year – in a booming market – hedge funds returned, on average, only 8% – compared to 16% for the S&P 500, according to research from Goldman Sachs. This year, through May, hedge funds returned 5% "compared with 15% gains for both the S&P 500 and the average large-cap core mutual fund," the Goldman report revealed.For another thing, there are the returns. Plenty of hedge-fund managers just aren't that good at what they do: the vast majority, for all their fancy strategies, don't beat the S&P 500 index. Last year – in a booming market – hedge funds returned, on average, only 8% – compared to 16% for the S&P 500, according to research from Goldman Sachs. This year, through May, hedge funds returned 5% "compared with 15% gains for both the S&P 500 and the average large-cap core mutual fund," the Goldman report revealed.
There are some hedge-fund managers who do better than that, but in general, these are the ones who only manage huge sums. The entry level here can be $100m or more.There are some hedge-fund managers who do better than that, but in general, these are the ones who only manage huge sums. The entry level here can be $100m or more.
The other side of the coin is that there will always be regular investors who overestimate their own sophistication. A growing number of baby-boomers have taken to trading in options, a kind of Wall Street derivative. Many large financial players, including Schwab, savvily moved to advertise options trading to regular people back in 2011 – and that has paid off for them. The question is whether it will also pay off, long-term, for the boomers who are betting their pension plans.The other side of the coin is that there will always be regular investors who overestimate their own sophistication. A growing number of baby-boomers have taken to trading in options, a kind of Wall Street derivative. Many large financial players, including Schwab, savvily moved to advertise options trading to regular people back in 2011 – and that has paid off for them. The question is whether it will also pay off, long-term, for the boomers who are betting their pension plans.
Make no mistake: anyone who is not a professional investor is outmatched in the market. In fact, most professional investors are outmatched in the market: it's bigger, more complicated, more full of information and more intimidating than any single person can really wrap their heads around.Make no mistake: anyone who is not a professional investor is outmatched in the market. In fact, most professional investors are outmatched in the market: it's bigger, more complicated, more full of information and more intimidating than any single person can really wrap their heads around.
Just take, for instance, the issue of "information asymmetry". Thomson Reuters has been charging some investors extra dues for providing key economic information, such as consumer confidence numbers, a mere two seconds ahead of general release. (What Reuters has been doing is likely entirely legal, according even to opponents of the practice.) This provides insight into how Wall Street works. It is always possible to pay for better trading advantages, which means that the game is rigged. But those privileges go only to the highest bidder. So, if you're working just with your retirement fund, you can't afford the price of entry to the Wall Street club … and you're much more likely to lose money.Just take, for instance, the issue of "information asymmetry". Thomson Reuters has been charging some investors extra dues for providing key economic information, such as consumer confidence numbers, a mere two seconds ahead of general release. (What Reuters has been doing is likely entirely legal, according even to opponents of the practice.) This provides insight into how Wall Street works. It is always possible to pay for better trading advantages, which means that the game is rigged. But those privileges go only to the highest bidder. So, if you're working just with your retirement fund, you can't afford the price of entry to the Wall Street club … and you're much more likely to lose money.
Inevitably, people with $1m will be seduced by the glamor attached to the idea of investing in hedge funds. They will include otherwise smart people, such as lawyers and doctors, who have no experience in finance but are willing to trust Wall Street's advice. Be ware: the problem with Wall Street's steady, SEC-enabled creep into Main Street is that, as it spreads like a fungus, it's intent mainly on its own survival. Mostly at your expense.Inevitably, people with $1m will be seduced by the glamor attached to the idea of investing in hedge funds. They will include otherwise smart people, such as lawyers and doctors, who have no experience in finance but are willing to trust Wall Street's advice. Be ware: the problem with Wall Street's steady, SEC-enabled creep into Main Street is that, as it spreads like a fungus, it's intent mainly on its own survival. Mostly at your expense.
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