Hedge Funds in Delaware
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| Trimming the Hedge |
Some day a shrewd observer of the passing scene will notice the peculiar quality which attracts some businesses to the state of Delaware, and coin a catchy phrase like Delaware Attractiveness to describe it in a nutshell. It surely underlies the way major national corporations predominantly incorporate under the laws of Delaware; other states don't like that. It probably accounts for the unusual accumulation of national credit card companies in that little state. Right now, it must be surmised to account for 24% of American hedge funds locating in Delaware. Just what is Delaware Attractiveness?
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| James Madison |
James Madison, the main author of our national Constitution, disliked taxes and debt and celebrated the ability of taxpayers to move to a different state if their home state raised taxes too high, or accumulated too much debt, with its embedded prediction of higher taxes later. The right to migrate away acts a a discipline on state governments tempted to abuse their power. A good example now exists in New Jersey, where one percent of the population pays 42% of the taxes, and that one percent is moving out of New Jersey as fast as it can. Eventually, 42% of taxes will be dumped on those who remain, and eventually something will be done about New Jersey state expenditures.
So conversely, little Delaware once had relatively few corporations, and had little to lose by lowering corporation taxes. Soon, these low taxes attracted corporations from other states to incorporate in Delaware, and a good thing for everybody except the beleaguered governors of other states who had to look elsewhere for feathers to pluck. When credit cards were invented, they were attracted to Delaware by low taxes and gentle regulation. They were clean non-polluting businesses who employed a lot of rural labor made available by dramatically enhanced agricultural productivity. One member of the Delaware Chamber of Commerce once mused, if it would attract the right sort of business, any hampering state legislation could be changed over a weekend.
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| Adlai Stevenson |
This spirit of the American Liechtenstein has now attracted 24% of hedge funds to Delaware before most people know what a hedge fund is, or if they know are still in the tentative stage of thinking they are a good thing to stay away from. Without delving into the full complexity of the subject, it can be said that a hedge fund locks the investor's money up for several years, and tells the investor very little about what it is doing with his money. One hedge fund operator stoutly defended the need to keep others from knowing his positions, illustrating how competitors who knew his positions would destroy him by "front-running", typically by flooding his positions with sell orders about ten minutes before or after the closing bell on the stock market. You can see how that might be ruinous, but you can't see how it differs from the situation of everybody else, like the big mutual funds. It is thus tempting to regard the ability to front-run, and the ability to avoid having it happen to you, constitute a business advantage, an "edge". There may be more to it than that, but such other features are cloaked in the secrecy which hedge funds enjoy, so secrecy is the business plan of hedge funds, apparently more tolerantly treated in Delaware than elsewhere. The price which hedge funds pay for their right to secrecy is the limitation imposed on them by the regulators as to who may be their customers. Somehow, a customer must be defined as a rich sophisticated person, who knows what risks are involved, and can afford to lose his money. Being in a small, closely-knit community where word of mouth is trusted, adds some degree of safety too. Adlai Stevenson once made an observation about such things.
"In the past it was said, a fool and his money are soon parted. But nowadays -- it could happen to anyone."
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201 N. Orange Street, Suite 200 P.O. Box 671 Wilmington, DE 19899-0671  |
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