Money and debt, addiction, parasitism

The research community of the Money Research Institute raises questions about the synergy between money and debt, the power of trust and its material expression. As part of the solution to this problem, on the basis of personal experience and empirical contact with tens of thousands of people from various social groups with money, rational behavioural models are projected which are designed to prevent the subjects of commodity-money relations from falling into dependence or a debt-ridden, parasitic network.

Parasitic financial networks

Parasitic financial networks are systems or organisations that extract profit or wealth through various manipulations and schemes without creating any real value by not investing in the real economy.

Such financial networks can be organised as illegal schemes, such as pyramid schemes or financial pyramids, where new participants invest funds, which are then distributed to the earlier participants.

These schemes usually collapse when there are not enough new participants to sustain the payments.
Parasitic financial networks may include legitimate but ethically questionable practices, such as hedge funds or companies that speculate in financial markets, making profits from fluctuations in securities but not creating real economic value by not investing in the production of goods or services.

It should be noted that the term “parasitic financial networks” is not an official and widely recognised term in financial science or practice. It is used in a general sense to describe practices that are perceived as exploitative or unfair in finance.

Features of hedge funds

Hedge funds are a type of investment fund that are managed by professionals and are designed to raise capital from investors in order to maximise returns.

Hedge funds are popular with wealthy investors, institutional investors and pension funds.

Features of hedge funds are:

1.  Variety of strategies. Hedge funds can use a variety of strategies to generate returns. Some focus on long-term investments in stocks and bonds, others engage in active trading in financial markets, while others speculate on price and currency fluctuations.

2. the use of leverage. Hedge funds can use financial leverage (borrowed funds) to increase their investment capital and potential returns. This increases the potential profit but also increases the risk of loss.

3.  Flexibility in portfolio management. Hedge funds have more flexibility in portfolio management than traditional investment funds. They can employ different strategies to protect against or profit from risks.

4. investment restrictions. Hedge funds are usually limited in their activities because they invest in products and instruments that are not available to conventional investors. They can use derivatives, invest in complex structures or employ alternative strategies that require specialised knowledge and access to markets.

5.  High risk. Hedge funds, because of their flexibility and use of leverage, can be exposed to a high level of risk. Losses can occur due to unforeseen market conditions, management errors or incorrect strategies.

It is important to note that hedge funds are often regulated by the relevant financial authorities in the countries in which they operate. These bodies set rules and requirements for hedge funds in order to protect investors’ interests and ensure the stability of the financial markets.

Notable hedge funds:

1. Bridgewater Associates. One of the largest hedge funds in the world, specialising in global macro investments. Bridgewater Associates is known for its strategies based on economic and political factor analysis.

2. Renaissance Technologies. This hedge fund, also known as RenTech, uses sophisticated mathematical models and algorithms to trade the financial markets. RenTech is known for its Medallion fund, which has shown impressive returns.

3. Citadel. Citadel is a diversified hedge fund that focuses on a wide range of strategies including arbitrage, equity and bond trading and risk management. They also have their own trading platform.

4. Elliott Management. This hedge fund specialises in activist investments and participation in corporate events.

5. Brevan Howard. This hedge fund focuses on global macro investments and derivatives trading.

6. DE Shaw Group. DE Shaw Group is a hedge fund that combines high-frequency trading, macro investment and a systematic approach to portfolio management.

It should be stressed that the hedge fund market is diverse and there are many other funds with different strategies and specialisations.

Ethically contentious practices of hedge funds

Hedge funds typically operate in a low-regulation, highly confidential environment, which allows them to employ a variety of ethically questionable practices, such as:

– The use of inside information. This means that hedge funds access information about companies or events that is not publicly available and use it to make profitable deals. This violates the principle of investor equality and can affect the pricing of the market.

– Market manipulation. This means that hedge funds create an artificial demand or supply for certain assets in order to change their price in their favour. This can lead to losses for other participants in the market, as well as to market disruption.

– Concealment of conflicts of interest. This means that hedge funds do not disclose to their clients or regulators their relationships with other funds, companies or individuals who may influence their activities or decisions.

This can lead to abuse of trust and unfair client service.

– Tax evasion. This means that hedge funds use various legal tricks and schemes to minimise their tax liabilities. This can lead to insufficient funds for government spending and an uneven distribution of the tax burden.

These and other hedge fund practices have drawn much criticism and debate from the public and among experts. Some believe that hedge funds promote innovation and diversification in the market and provide opportunities for high-yield investments. Others see hedge funds as a threat to financial stability and social justice.

Hedge fund scandals in 2023

Recently, news about scandals related to hedge funds has been heard more and more often. What is behind these events and how do they affect the global economy?

Hedge funds are special investment funds that use various strategies to generate high returns that are independent of market conditions.
Hedge funds can use aggressive techniques (leverage, derivatives, short selling, etc.). This allows them to increase their profits, but it also increases the risk of loss.

In 2023, hedge funds faced a number of serious problems that undermined their reputation and financial position. Among them, the following can be highlighted:

– The Archegos Capital Management fund scandal, which went bankrupt after failing to repay its debts to brokers. The fund used huge leverage to speculate on the stocks of large companies such as ViacomCBS, Discovery and Tencent. When the prices of these stocks plummeted, the fund was unable to meet the brokers’ demands for additional collateral and was forced to sell its positions at discounted prices. This resulted in huge losses not only for the fund, but also for its creditors (Cheredit Suisse, Nomura, Morgan Stanley, etc.).

– The Greensill Capital fund, which specialised in supply chain finance, was a scandal. The fund provided loans to companies that were waiting for payment from their customers. To do this, the fund bought the accounts of these companies at a discount and sold them to investors as securities. However, it turned out that many of these invoices were fictitious or inflated, and some of the borrowing companies were insolvent or bankrupt. This resulted in the fund being unable to return money to its investors and was declared insolvent. Among those affected by this scandal are the hedge fund GAM, Credit Suisse Bank, and the insurance company Tokio Marine.

– The Melvin Capital fund scandal, which lost about 50 per cent of its capital in January 2023 due to an attack by retail investors on Reddit. The fund was short-selling shares of companies deemed overvalued or obsolete (GameStop, AMC, BlackBerry, etc.). However, a group of investors from the WallStreetBets forum decided to back these companies and started actively buying their shares, driving up the prices. This forced the fund to close its short positions with heavy losses. The fund had to ask for help from other hedge funds (Citadel and Point72), which invested $2.75 billion in it.

These and other scandals have shown that hedge funds are not always reliable and transparent investment instruments. They can be damaging not only to their clients, but also to the entire financial system. It is important that regulators and supervisors strengthen control over hedge funds and introduce stricter requirements for their reporting, risk management and capitalisation.