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Issue for ...
September 21, 2008
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Dear Friends,
I hinted last week at the opportunity to help the Institute launch a
hedge fund. Today offers additional details. Without further ado, I
give you...
The Lender Opportunity Explained
As you may have noticed, the Pakistani stock market recently crashed
and halted trading (with investors throwing bricks at the stock
exchange building), Russia's stock market crashed and halted trading
for several days in a row, China's stock market is down 60%, the
U.S. stock market continues to crash and burn on its way to a Dow of
7,000-7,500 (the current 'sucker rally' notwithstanding), and 'U.S.
Treasury three-month bill rates dropped to the lowest since at least
1954 on concern that credit market losses will widen after the
bankruptcy of Lehman Brothers...' (Bloomberg.)
In short, the entire financial world is going to h*ll in a hand
basket. Visit http://financialrealitynews.blogspot.com for the
latest post: "Economic 911 - Depression Next."
WHAT BETTER TIME TO LAUNCH A HEDGE FUND!!!!!?
It's true. The Institute is launching an honest-to-goodness hedge
fund. The Liberty Private Placement Fund, L.P. is being chartered
and registered in Concord, New Hampshire as I write. The fund should
be up and running by the first quarter of 2009.
I, your intrepid author, will descend daily in a shark-proof cage to
trade the fund live in the spot Forex market. Additionally, the fund
will utilize several of the Institute's super-secret, proprietary
trading systems, as well as systems from other firms and
researchers.
The fund will be well-diversified amongst strategies, sectors and
markets, while utilizing various risk mitigation methods, including
dynamic position sizing, trailing equity stops, hedging where
appropriate and a BIG RED 'CLOSE ALL TRADES!!!' button when all else
fails.
While performance expectations range upwards of 6% per month (72%
per year, give or take), minimum (i.e., baseline) monthly
performance is projected at 2% (24% per year), a rate which will
potentially double capital every two years or thereabouts. Just a
little better than a local bank CD and, sadly, still no toaster.
Per SEC rules, the fund will be regulated up the whazoo and
therefore (albeit unfortunately) open to 'accredited investors only'
-- i.e., to individuals who (get this), given current economic
conditions, meet either of the following humorous criteria: 1. A net
worth of $1,000,000 or; 2. At least $200,000 of income in each of
the two previous years.
While the Institute includes among its students, acquaintances and
family members many accomplished, socially esteemed and high-net
worth individuals, we also enjoy the company of a number of lovable
reprobates, scoundrels and ne'er-do- wells, all of whom don't have a
plugged nickel between them and none of whom would be allowed in the
local Chamber of Commerce, let alone a hedge fund.
Alas, how can we help these dear souls if the SEC would abandon them
to paltry bank CD's, anemic mutual funds all (just about) going
backwards, and an economy that resembles the Titanic after scraping
the iceberg? We'll get to that shortly, but first let's continue
painting the picture.
As you might imagine, the 'Liberty Fund' will require significant
capital to launch, significant being a whole lot greater than zero.
And trust me when I tell you 'they' don't make it easy to get one of
these things started. There are many T's to cross, I's to dot and
flaming hoops to jump through. And that's just to get an appointment
with our lawyer.
For starters, the costs of structuring, registration, licensure,
bonding and legal fees are substantial. Then there will be the costs
of a small staff to answer the phone, make coffee and shred
documents (I'm leaning towards the Fawn Hill model, personally.)
There will even be a full-time staff CPA to pay, plus a CPA to audit
the first CPA, another requirement of our benevolent central
planners.
Additionally (and this is the fun part, aside from making a lot of
money, that is), there will be the costs of travel to 'take the show
on the road.' You see, SEC rules prohibit marketing directly to the
public via mass advertising such as magazine ads, web sites,
business cards left on bus seats, etc. We can only presume that Wall
Street doesn't want the competition.
To attain the numbers of prospective investors the 'Liberty Fund'
will need to be truly successful, yours truly will need to abandon
the peace and tranquility of my hardened underground trading bunker
and head out into the rude world to 'press the flesh,' 'show the
plan' (no Amway circles, I promise) and explain the opportunity.
Meaning that a used and economical (if modestly lavish) RV will be
required, complete with a swiveling satellite dish for omnipresent
Internet, rear view TV cameras and loud backup beepers in case my
wife is driving (only kidding, honey) and capacious rooftop play
space for our three nearly perfect children who may be required to
stay up there 24/7 if they don't behave.
Things can get pretty crazy with five people locked in an RV for
weeks on end, surviving on quadraphonic surround sound, luxurious
vibromassage captain's trading chairs, infrared deep heat shower
stall to relax after hours spent battling candlesticks and
intelligent cruise control so you can get up and go make coffee (in
reference to Merv Gravinsky, 20004 first place winner of the annual
Darwin Awards. See http://forums.chargers.com/archive/index.php/t-15515.html)
As you can imagine, the launching of a 'private placement fund' is
an undertaking of brobdinagian proportion. (Note my use of the term
'private placement fund,' which although technically more accurate,
is probably less desirable than 'hedge fund' since most of the
world's hedge funds have recently imploded, exploded or otherwise
vaporized. However, hedge fund, like Kleenex, is a more familiar
term, therefore I shall use it henceforth.)
There are several ways our family could raise the required capital.
One way would be to liquidate current holdings of precious metals
just as they're about to explode. That's no fun. Another is to
borrow money through conventional routes (bank, angels with deep
pockets, brother-in-law, etc..) This is called 'OPM' which stands
for 'Other People's Money' and is as traditional as Mom, apple pie
and Enron.
However, there is a third way, one that is little known to the
general public but used regularly by the Big Boyz, many of whom
share more than a little DNA with Bugsy Siegel. Case in point:
several of the largest casinos have used this specific method to
raise private capital.
This method of acquiring startup capital is well suited to projects
that require substantial startup funding, have a delayed launch
date, and enjoy the potential for high rates of return. Take the
example just mentioned of a casino. A large and pricey piece of
prime real estate must be purchased, bribes and kickbacks must be
paid, architects must be hired to design the blueprints.
Finally, ground is broken and construction begins. A year later the
doors open for gambling and the 'skim' * starts lining investor's
pockets (* in Las Vegas and other gambling meccas, house profits are
variously knows as the 'skim,' the 'rake,' the 'take, the 'vig,' and
other colorful terms, any of which would equally apply to the
casinos on Wall Street.)
The above example applies equally to the launch of a hedge fund. If
we think of the world's trading and investing markets as glorified
casinos (which they are) and each trade or investment as a
calculated bet (which it is); if we further compare structuring and
registration of a hedge fund to ground breaking and construction of
the casino, then equate the opening of the casino's doors to its
gambling patrons to the opening of a hedge fund's doors to its
accredited investors, we see that the analogy holds perfectly!
As for describing this long-established yet little-known funding
mechanism, it is a means whereby private individuals known as
'lenders' loan money to a 'borrower' in the expectation of receiving
back more than the loan amount. But what is so unusual about that?
After all, I just described every loan ever made.
For starters, there is no standard amortization of this type of
loan. For another, there is no fixed or periodic interest rate.
Finally, there is no fixed term. As you can see, this is not your
garden variety loan. It is what is called a 'contractual',
'non-statutory loan agreement' and requires some explanation.
This form of loan essentially involves the borrower establishing how
much of their gross income they wish to sell, as well as the size of
a standard loan unit.
The borrower contracts with one or more lenders to pay each lender a
percentage of the operation's gross income, directly 'off the top.'
The lender receives their periodic, proportionate percentage share
of all gross income until such time as the loan has been satisfied,
which is when as stipulated in the loan agreement, the lender has
received a specified multiple of the loan amount, say, ten times the
amount loaned.
Here is an example. Say a casino needs to raise $10,000,000 (ten
million) to open its doors to marks, I mean, the public. They decide
to sell 20% of gross revenue at $500,000 per loan unit. They
contract with private lenders to pay each back 10 times their loan
amount. If 20 loan units are sold @ $500,000 each, the startup goal
of $10,000,000 will have been raised from 20 private lenders, each
of whom will receive 1% of the casino's gross profits until such
time as each has been paid a total of $5,000,000, or 10 times the
amount each loaned.
The casino will end up paying out 10 X $10,000,000 or $100,000,000
(one-hundred million) by the time the loans are extinguished. With
me so far? If I lost you, please read the previous paragraph again.
If your calculator won't display that many digits, you'll have to
resort to pencil and paper.
The big question is, how long a repayment period will be required?
The answer to that question represents the lender's true risk. After
all, given human nature, what casino will ever lose money? Say the
casino grosses $1,000,000 (one million) dollars a year. Each lender
will receive 1% of that amount, or $10,000 a year. At that rate it
would take them 50 years just to recoup their $500,000 loan, plus
another 500 years for their loan repayment to be complete.
If, on the other hand, the casino takes in $10,000,000 (ten million)
a year, each lender will receive $100,000 a year, their loan
principal will have been repaid within 5 years, and they will
continue to receive $100,000 a year for another 50 years. Not a bad
retirement package.
However, if the casino takes in $100,000,000 (one-hundred million) a
year which is more likely, each lender will receive $1,000,000 a
year, their loan principal will have been repaid within 6 months,
and they will continue to receive $1,000,000 a year for another 5
years, at which point they can help to launch another few casinos.
Do you remember my earlier mentioning that public advertising by
registered hedge funds is verboten? However, a method of meeting new
people yet staying carefully on this side of the razor wire is to be
introduced to the 'warm market' of *your* warm market, meaning to
the friends and acquaintances of your friends and acquaintances. All
very privately, of course. Think: clandestine meetings in church
basements, rallies in Confederate cow barns ('watch where you step
there, ma'am'), dignified presentations to social clubs (where I'm
forced to wear my only tie), and Tupperware parties in friends'
living rooms (minus the plastic bowls.)
Returning to the present example wherein I discuss the launching of
the world's most powerful hedge fund -- The 'Liberty Fund' -- faster
than a speeding financial planner, and able to leap tall
candlesticks in a single bound...
* The borrower is my dear wife and family parole officer who allows
me out of the office on good behavior, Marlena Phillips,
home-schooling Super Mom of three, suburban goddess and Director of
The Institute of Higher Earning;
* The loan unit is $10,000 which does not get you 1% of Marlena,
just 1% of her management incentive fees for generating the fund's
profits;
* The total amount to be raised is $200,000, and;
* The payback multiple is 10:1 (yes, ten times the loan amount, as
in 1,000%.)
Unlike the casino example, the objective here is not specifically to
seek 20 lenders of $10,000 each, with each contracted to receive
$100,000 in return, although that is a possible outcome. It is to
help as many folks as possible, including the broke, the almost
broke and the soon-to-be-broke, the minimum loan amount being $100,
otherwise known as a 'micro-loan.'
The lender who loans $100 would contract to receive $1,000 in
return. The loan cost would be equivalent to splurging on a late
night, after-bowling snack at Shoney's for a party of 10. No one
would be betting the farm and matrimonial harmony would be
preserved. Of course, at this rate we'd need 2,000 lenders, enough
to populate a small town.
Another point about lending. When you lend capital to a startup
venture via the traditional amortized loan, your loan is serviced
AFTER other expenses have been paid. What if the person starting the
venture is the ostentatious type, given to wearing Armani suits and
driving a Lexus? What if s/he requires a luxury corner office and a
private Lear jet? The company could 'live the life of Riley,' file
bankruptcy and you'd never see a dime.
Under the contractual, non-statutory loan agreement, the lender is
paid BEFORE any other expenses are paid. That is because the loan
agreement calls for the lender to be paid periodically (usually
quarterly), directly from GROSS INCOME, as it arrives, in full view,
and easily exposed simply by showing the books and records of the
operation, which the loan contract requires.
So basically you have two choices: blow a benjamin at a Shoneys
'all-you-can eat,' or loan one (or a wad) to a nice Mom which will
help your wallet get fat (as opposed to you personally.) Of course,
there is no limit to the loan size, although Marlena doesn't want to
see anyone infuse more than 5%-10% of all discretionary funds they
are willing to put at risk in any form of trading and investing,
including lottery tickets, mutual funds and church bingo.
Well, that's about it. This should be lots of fun as well as
obscenely profitable which makes it even more fun. As for potential
performance, I'm currently doing about 21% a month at modest
leverage trading the Forex (with maximum single day draw down of
1.9%), our wave cycle system of trading the stock market alternately
long and short is averaging a hair over 7% a month, and the other
systems I intend to use are each averaging between 5% and 12% a
month.
So I don't think it will be too much of a problem generating a
consistent 24% a year, minimum, even under the worst of
circumstances. Basically, I'll get to do what I've been doing all
along, just with a lot more zeroes.
Once a few years have passed and our management profits from the
fund have multiplied substantially, we'll be able to pursue our next
major life project, which is to start an international home school,
teach the timeless principles of liberty and free market economics,
and reverse-engineer the persistent pubic school perversion of the
prevailing pre-teen paradigm. More on that in next week's HIGHER
EARNING REPORT.
But first, the 'Liberty Fund' needs to clear the launch tower, which
is where you can help. If you're interested, you'd best not dilly
dally. The lender line is forming quickly and there are only so many
tickets to the show. Got questions? Drop me a line. Also, ask me
about creating a local investment club and taking a dip together in
a 'lender pool.' This could prove a highly remunerative opportunity
for you go-getters. See you next week. Take care.
And May The Pip Be With You,
Gordon Philips for
THE INSTITUTE OF HIGHER EARNING
gordon@higherearning.com
.· ´¨¨)) -:¦:-¸.·´ .·´¨¨))
((¸¸.·´ ..·´ When you wish -:¦:- -:¦:-
-:¦:- ((¸¸.·´* upon a pip... -:¦:- -:¦:-
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YOUR EDITOR
Gordon Philips, Senior Researcher, Head Trader,
Custodian, Home School Referee and Complaint
Department Manager for the Institute
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WHAT IS THE HIGHER EARNING REPORT?
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PUBLISHED BY:
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P.O. Box 113
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800-504-2340
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not.
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DISCLAIMER
Information from The Institute Of Higher Earning is provided for
educational and informational purposes only. No one on our utterly
wonderful staff is licensed to utter personalized financial advice.
Before trading or investing we suggest that you seek the counsel of
a registered financial advisor who is thoroughly versed in the
equities and currency markets and can demonstrate consistent success
in both. Warning: this may be a protracted search. Our work is based
on what we've learned as financial journalists and graduates summa
cum laude from The School Of Hard Knocks. It may contain errors and
you shouldn't make any investment decision based solely on what you
read here (watch MSNBC first ;-.) There is risk inherent in all
forms of trading and investing, from baseball cards to church bingo,
so don't trade or invest with money that you cannot afford to watch
go up in smoke and still sleep well. If in doubt, consult spouse.
Thank you. |
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