How to Invest Like the Super-Rich

How to Invest Like the Super-Rich by STREET AUTHORITY

What do Larry Ellison, Sean Combs, Ted Turner, Bono and Saudi Prince Alwaleed have in common with thousands of other very wealthy people? It certainly isn’t their style of dress, philosophy or even how they made their money.

In fact, these folks couldn’t be more different in terms of just about anything. The one common thread between these billionaires and many other members of the wealthy class is that they either are or have invested in hedge funds.

Hedge funds are the common denominator that separates how the wealthy invest compared to the rest of us. In fact, the majority of investors are prohibited by law to invest in hedge funds. Totally and completely unfair, I understand, but these wealth-building tools of the uber-rich are also very risky. The government sees fit to protect undercapitalized, unsophisticated investors from the risks of hedge funds, but at the same time prevents the average investor from benefiting from the massive rewards available in this investment arena.

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Until now, that is. But more on that in a moment…

So what exactly is a hedge fund? Briefly stated, a hedge fund is a lightly-regulated investment partnership that can use any strategy or invest in anything you can possibly think of. There are hedge funds that invest in real estate, art, collectibles, lawsuits and even water rights. It’s a broad universe of potential investments, but the majority of hedge funds invest in equities, bonds, derivatives and currencies.

Hedge funds have an advantage since they have the capital to hire the best investment-picking talent, computer power, knowledge and information on Earth. 

Unlike mutual funds, hedge funds can usually make investments based on whatever the manager thinks is best at the time. Hedge funds are not permitted to advertise, so the only way an investor can discover funds, other than the obvious big names, is by way of introduction. So not only do you need to be personally introduced to most of the top performing funds, the manager can decide whether to accept your investment.

While there is no official minimum investment for hedge funds, very, very few accept anything less than $100,000. Many hedge funds require a minimum of $1 million, and a few demand a minimum investment of $25 million. Obviously, these minimums really eliminate everyone but the very rich from investing in hedge funds. Not only are the minimums high, but most hedge funds require lock-up periods for your investment ranging from six months to several years. Although there are ways to get your money out, despite the lockup, it can be very costly.

As you can see, hedge funds are only investments for those with a substantial tolerance for risk — not to mention a fat bank account.

But it is possible for investors like you and me to mirror their performance. A new exchange-traded fund (ETF) has just been launched that tries to replicate equity hedge fund performance. The ETF is theGlobal X Top Guru Holdings Index ETF (NYSE: GURU).

GURU has just launched, so it has very limited history. However, back testing reveals the GURU ETF would have climbed roughly 30% annually during the past three years, beating the S&P 500′s 22% average yearly gain.

The ETF invests in the single largest holdings of 68 top hedge funds, including John Paulson’s Paulson & Co., Bill Ackman’s Pershing Square Capital Management, David Tepper’s Appaloosa Management, David Einhorn’s Greenlight Capital and Daniel Loeb’s Third Point.

As you can guess, there is much duplication in the holdings of the top hedge funds. Therefore, the fund consists of just 51 stocks, all equally-weighted at 1.96%. Technology, financial and industrial stocks comprise nearly 55% of the fund, with holdings including Apple (Nasdaq: AAPL), Microsoft (Nasdaq:MSFT), Google (Nasdaq: GOOG), JPMorgan Chase (NYSE: JPM), AIG (NYSE: AIG), and Sallie Mae owner SLM Corp.

GURU charges a fee of 0.75% of assets to cover expenses. It’s important to note that most hedge funds charge a 2% management fee and 20% of profits on an annual basis.

So what secretive method does GURU use to determine what are the top holdings of hedge funds? Well, it’s really no secret at all.

Every quarter, all funds with over $100 million in assets are required to file a form 13-F with the Securities & Exchange Commission. This form is publicly discloses the holdings of these funds. GURU then uses proprietary methodology to determine the highest conviction ideas among this list for the underlying assets of the ETF.

Risks to Consider: Despite all their advantages, hedge funds can and do lose money. Consider Long Term Capital Management and other high-profile fund blow-ups. As you know, just because professionals are invested in the same stocks does not guarantee performance by any stretch. In addition, GURU is a brand new ETF with no historical track record.

Action to Take –> I’m bullish on the future of hedge funds, therefore very excited about this new ETF that opens up the world of equity hedge funds to everyday investors. It’s about time that the hedge fund world starts to become democratized. This ETF and another recently launched one, AlphaClone Alternative Alpha ETF (NYSE: ALFA), are the first steps in this process. If you are bullish on hedge funds as well as stocks in general, taking a long position in hedge fund-replicating ETFs makes sense.

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How The Very Rich Avoid Paying Taxes…

How The Very Rich Avoid Paying Taxes… by THE ECONOMIC COLLAPSE BLOG

The way that we tax people in the United States is fundamentally broken and should be completely discarded.  The U.S. tax code is absolutely riddled with loopholes that allow the super rich to legally avoid taxes while many of the rest of us are being taxed into oblivion.  In our system of taxation, middle class families that work hard and try to play by the rules are deeply penalized while those that are willing to abuse the system make out like bandits.  There is something fundamentally wrong with a system that enables wealthy politicians such as Barack Obama and Mitt Romney to pay a smaller percentage of their incomes in taxes than millions of middle class families.  Mitt Romney has millions of dollars parked down in the Cayman Islands and in other tax havens.  He does this to avoid taxes.  Unfortunately, most Americans do not have the resources to funnel money through offshore tax havens.  Most Americans just automatically have their paychecks shredded by taxes and then try to live on whatever is left over.  Most Americans are just trying to survive financially from one month to the next.  But the super rich have options.  Thanks to technology, they can live almost anywhere they want and they can run their companies and manage their investments from anywhere in the world.  The truth is that the wealthier you are the easier it is to avoid taxes.  But even as the ultra-wealthy do their best to avoid taxes, many of them still feel free to demand that the rest of us be taxed more.

So what are some of the ways that the super rich avoid taxes?

Well, let’s start with those that are just “somewhat wealthy”.  Many millionaires still want or need to be U.S. citizens, so they are subject to the U.S. tax code.  Fortunately for them, their tax lawyers know of thousands of loopholes that have been designed to help the rich avoid taxes.

The following is from a recent article by Jen Talley….

Some of the richest people in the country pay the least, relatively speaking, in taxes. How is this possible? Answer: Through the clever manipulation of the U.S. tax code’s loopholes. And it works: as income rises, effective tax rates rise as well, but only up to a point. IRS data shows that the effective income tax rate flattens out at just over 24 percent for those making over a million dollars. As income exceeds $1.5 million, the rate begins to decline; those with incomes above $10 million pay an average income tax rate of around 19 percent. So, how do they do it?

You could write an entire series of books on the technical details of how this gets done.  Trust me, I studied tax law when I was in law school.

If you are interested in digging into some of the technical details of tax avoidance, a recent Businessweek article detailed 10 ways that the wealthy use our current tax code to avoid paying billions of dollars in taxes.  It is an article worth reading if you have the time.

Sadly, tax avoidance by the wealthy is not just something that happens in the United States.  The truth is that the exact same kind of thing happens in the UK as well.

There is not an easy fix to this problem.  Our politicians have had decades to try to come up with a fair tax system and they have completely failed.  The wealthy are always several steps ahead of them.

But federal taxes are not the only taxes that can be avoided.  The vast difference in state tax rates creates another opportunity.

One advantage that wealthy Americans have is that they are far more mobile than most other Americans are.  So if they don’t like the tax system in one state they can simply pick up and move to another state.

According to the Tax Foundation, 3.4 million Americans left New York state between 2000 and 2010.

So where did they go?

The following is from a recent CNS News article….

Where are they escaping to?  The Tax Foundation found that more than 600,000 New York residents moved to Florida over the decade – opting perhaps for the Sunshine State’s more lenient tax system – taking nearly $20 billion in adjusted growth income with them.

There is no state income tax in Florida.  So moving from New York to Florida can end up saving you a bundle.

The same kind of migration is happening out west as well.  According to that same CNS article, hundreds of thousands of people have been moving from California (a high tax state) to Texas (no state income tax)….

Between 2000 and 2010, the most recent data available, 551,914 people left California for Texas, taking $14.3 billion in income.  Texas has no state income tax or estate tax.

A total of 48,877 people moved to Texas from California between 2009 and 2010 alone, totaling $1.2 billion in income.  Another 28,088 from California relocated to Nevada and 30,663 to Arizona, a loss of  $699.1 million and $707.8 million in income respectively.

Not that anyone really needs much of an excuse to move away from California.  It israpidly decaying right in front of our eyes.

But a lot of families do not have the same options that wealthy people do. Unfortunately, most average Americans are tied to their jobs and it would be much more difficult for them to pick up and move across the country.  In this economy it can be economic suicide to give up a good job.

The reality is that most of us simply do not have the resources to play the same kinds of games that the wealthy play.

Sadly, even our most prominent politicians avoid taxes.

Just look at Massachusetts Senator John Kerry.  He has avoided approximately $500,000in taxes by docking his yacht in Rhode Island rather than in Massachusetts.

Yet Kerry sure does love to call for more taxes on the rest of us, doesn’t he?

Now let’s talk about the “super rich” and the “ultra-wealthy”.  For many people that are worth billions of dollars, tax avoidance has become an art from.

Facebook co-founder Eduardo Saverin made national headlines recently when he gave up his U.S. citizenship, but the truth is that his case is small potatoes compared to the global elite and the shadow banking system that supports them.

According to the IMF, the global elite are holding a total of 18 trillion dollars in offshore banks.

That amount is more than the GDP of the entire planet for an entire year.

So what do I mean by “offshore banks”?  I defined the term in a previous article….

Well, the term originally developed because the banks on the Channel Islands were “offshore” from the United Kingdom.  Most “offshore banks” are still located on islands today.  The Cayman Islands, Bermuda, the Bahamas, and the Isle of Man are examples of this.  Other “offshore banking centers” such as Monaco are actually not “offshore” at all, but the term applies to them anyway.

Traditionally, these offshore banking centers have been very attractive to both criminals and to the global elite because they would not tell anyone (including governments) about the money that anyone had parked there.

It has been reported that 80 percent of all international banking transactions involve offshore banks.  A whopping 1.4 trillion dollars is being held in offshore banks in the Cayman Islands alone.

An article that appeared in the Guardian estimated that a third of all the wealth on the entire planet is being kept in offshore banks.  One of the primary reasons for this is tax avoidance.

A lot of wealthy individuals never even visit these tax havens and yet reap the benefits anyway.  The truth is that tax avoidance has become way too easy.  The following example is from a recent Politico article….

A plausible scenario plays out like this: I hire an accountant. Doing her job, my accountant tells me that if I sign a few legal documents and route my money through a small Caribbean island, I could keep more of my paycheck and pay a lower tax rate. I may have earned my money in the United States, but legally I can claim that it was, in fact, earned in a tax haven.

Are you disgusted yet?

You should be.

But even though they avoid taxes like the plague, many of these elitists have the gall to call for higher taxes on all the rest of us.

For example, let’s review what the managing director of the IMF, Christine Lagarde, saidin a recent interview….

“Do you know what? As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax.”

Even more than she thinks about all those now struggling to survive without jobs or public services? “I think of them equally. And I think they should also help themselves collectively.” How? “By all paying their tax. Yeah.”

It sounds as if she’s essentially saying to the Greeks and others in Europe, you’ve had a nice time and now it’s payback time.

“That’s right.” She nods calmly. “Yeah.”

And what about their children, who can’t conceivably be held responsible? “Well, hey, parents are responsible, right? So parents have to pay their tax.”

Well, it turns out that she doesn’t pay any income taxes at all on her own income….

The IMF chief Christine Lagarde was accused of hypocrisy yesterday after it emerged that she pays no income tax – just days after blaming the Greeks for causing their financial peril by dodging their own bills.

The managing director of the International Monetary Fund is paid a salary of $467,940 (£298,675), automatically increased every year according to inflation. On top of that she receives an allowance of $83,760 – payable without “justification” – and additional expenses for entertainment, making her total package worth more than the amount received by US President Barack Obama according to reports last night.

Her “diplomatic status” allows her to escape all income taxes.

So perhaps she should pay her “fair share” before pointing the finger at anyone else.

But she is not the only one being hypocritical.

The super rich claim that they should pay lower taxes on investment income for the good of our “capitalist system”, but when their banks are about to go under they are more than happy to have those losses be socialized.

As I wrote about yesterday, the stage is already set for another massive round of bailouts when the next great financial crisis strikes.  Once again our taxes will pay for the mistakes of the ultra-wealthy.

The truth is that our system is fundamentally broken.

We need to abolish the income tax and shut down the IRS.

Those two steps alone would do wonders for our economic system.

We also need to shut down the Federal Reserve and break up the too big to fail banks.

Unfortunately, the vast majority of our politicians are not even willing to consider any of those solutions.

So our fundamentally broken system will continue to chug along.

It really is sad.

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