PHILADELPHIA REFLECTIONS
Musings of a Philadelphia Physician who has served the community for six decades

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Delaware (State of)
DelawareOriginally the "lower counties" of Pennsylvania, and thus one of three Quaker colonies founded by William Penn, Delaware has developed its own set of traditions and history.

Investing, Philadelphia Style
Land ownership once was the only practical form of savings, until banking matured in the mid-19th century. Philadelphia took an early lead in what is now called investment and still defines a certain style of it.

Personal Finance
The rules of financial health are simple, but remarkably hard to follow. Be frugal in order to save, use your savings to buy the whole market not parts of it, if this system ain't broke, don't fix it. And don't underestimate your longevity.

Federalism Slowly Conquers the States
Thirteen sovereign colonies voluntarily combined their power for the common good. But for two hundred years, the new federal government kept taking more power for itself.

..Constitution and Court
Forget all those lawyer jokes you hear. The American legal profession can rightly be proud of the Federal Court System, an achievement of the whole profession. America may be legalistic and overlawyered, but that reflects the rule of law dominated by lawyers. Curiously, the leader of this creation, John Marshall, was not so much a legal theoretician as a relentless Federalist lawyer, determined to reshape the legal profession to be worthy of power.

Hedge Funds in Delaware

{Trimming the Hedge}
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. The right to migrate away acts a a discipline on state governments tempted to abuse 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, that same 42% of taxes will be redistributed to those who remain, and something will be done about New Jersey state expenditures.

So conversely, little Delaware once had few corporations, and little to lose by lowering corporation taxes. Soon, these low taxes attracted corporations from other states to incorporate in Delaware. When credit cards were invented, they were attracted to Delaware by low taxes, gentle regulation and fair-minded courts. They were non-polluting businesses who employed a lot of rural labor made available by enhancements in 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.

{Adlai Stevenson}
Adlai Stevenson

This spirit of the American Liechtenstein attracted 24% of hedge funds to Delaware before most people knew what a hedge fund is. Without delving into the full complexity of the subject, a hedge fund addresses the instability of investing for the long term with short term money. Promising higher returns than mutual funds which can generally be liquidated overnight, a hedge fund locks the investor's money up for several years, and hence needs to tell its competitors (and unfortunately also the investor) comparatively 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. And, indeed that was a realistic concern, since 70% of current stock trading is performed by unattended computers, who can transact huge sales in seconds when they detect unusual patterns of activity. So, when the stock market crashed in 2007-2009, Congressmen were pressured to find scape-goats. Some blamed computerized trading, and some blamed hedge funds. Quite possibly, it was neither one, since hedge funds were comparatively unaffected by the crash, and "programmed" traders made a great deal of money. However, Delaware is discovering that anyone who visibly escapes a nation-wide panic is under suspicion of causing it, and must fight off hostile legislation at least until the full facts emerge. 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 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. Therefore, an acceptable hedge-fund customer gets 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 trusting such protections:

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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