A Hedge Fund Insider Explains Why Retail Investors Should Flee The Stock Market

Tyler Durden's picture

Regular readers know that ever since 2009, well before the confidence destroying flash crash of May 2010, Zero Hedge had been advocating that regular retail investors shun the equity market in its entirety as it is anything but "fair and efficient" in which frontrunning for a select few is legal, in which insider trading is permitted for politicians and is masked as "expert networks" for others, in which the government itself leaks information to a hand-picked elite of the wealthiest investors, in which investment banks send out their "huddle" top picks to "whale" accounts before everyone else gets access, in which hedge funds form "clubs" and collude in moving the market, in which millisecond algorithms make instantaneous decisions which regular investors can never hope to beat, in which daily record volatility triggers sell limits virtually assuring daytrading losses, and where the bid/ask spreads for all but the choicest few make the prospect of breaking even, let alone winning, quite daunting. In short: a rigged casino. What is gratifying is to see that this warning is permeating an ever broader cross-section of the retail population with hundreds of billions in equity fund outflows in the past two years. And yet, some pathological gamblers still return day after day, in hope of striking it rich, despite odds which make a slot machine seem like the proverbial pot of gold at the end of the rainbow. In that regard, we are happy to present another perspective: this time from a hedge fund insider who while advocating his support for the OWS movement, explains, in no uncertain terms, and in a somewhat more detailed and lucid fashion, both how and why the market is not only broken, but rigged, and why it is nothing but a wealth extraction mechanism in which the richest slowly but surely steal the money from everyone else who still trades any public stock equity.


From RedditI work in Wall Street and work in hedge fund analysis. I'm the only person in my office who supports OWS

This is a self-post, so I'm not trying to karma-whore or anything. I have a message I want to share with anyone who's interested.

I'm writing this in hopes that the OWS movement can have a better understanding of the hedge fund industry and the financial markets. With OWS being the zeitgeist of current politics, I think it's important to know how exactly the hedge funds, along with the financial markets are destroying the 99%.

Hedge funds. These guys are basically the vehicles of choice for ultra-rich people to get into the financial markets, besides family offices and private wealth managers. What are hedge funds? They are funds that have a 1-5 million deposit minimum, cater to the mega-rich, and can invest in anything without regulatory restrictions, use leverage to pump up their exposure by 15x, and pretty much eat up a vast majority of the industry's profits.

These guys invest in EVERYTHING. Instruments you've heard of - stocks, bonds, forwards, futures, currencies, and instruments that you, me, or anyone else have never even heard of, much less know anything about: commodity future swaptions, FRA/OIS swaps, CLOs, exotic future options, p-notes, index/commodity/equity exposures, and a huge array of OTC (over-the-counter) instruments that no regular investor would ever have access to.

Why I bring this up: the financial markets are rigged. 99% of the investing public has access to services such as basic brokerages, 401k/IRA's, mutual funds, pension plans, etc. Some of these services, especially pension funds, will invest into hedge funds, who take an additional 2 and 20 (meaning 2% of assets plus 20% of capital gains).

What this means is that if you go any of the traditional retail routes, you are utterly screwed facing off against the hedge funds.

First, you are paying exorbitant fees. Commissions on every stock trade. Mutual fund managers taking a cut - an annual % cut, as well as a % per profit cut. If these managers (i.e. pension plans) invest in another fund, that fund is also taking another % cut. You're down 2% the minute you invest your money.

Next, if you're doing the investing yourself, you're paying ridiculous spreads. The bid/ask spread of a stock will cause you to be down another 2-3% the minute you buy the stock. For example, if you're buying a share of company at $4.25, you can sell back at only $4.15.

Furthermore, you have absolutely no chance in terms of access to the best services. Hedge funds have a direct line to investment bank's institutional brokerage teams - these are the guys that spend day and night sucking up to hedge funds, trying to get them the best deals at the cheapest rates. This means that while you're buying stocks and bonds, hedge funds are getting special rights, warrants, sweetheart deals, private placement deals, options, bigger discounts on bonds, and much better bulk commission rates and lower spreads on stocks. If you're paying 4.25$ for a 4.15$ stock, they are paying something like 4.16$. And they are eating alive your profits because when the stock goes up to $4.30, they can activate another warrant to purchase 20m shares at $4.25, diluting the value of your shares.

Next, you lack information and exposure. You have no idea what is going on in the market besides what you see on the news - while hedge funds have analysts working around the clock and a bunch of service providers who give minute-by-minute analysis of their portfolio opportunities and weaknesses in all markets with exposures to nearly everything. Meaning, if there is an opportunity in the real estate market (i.e. legislation), it might take you weeks to get in - hedge funds will have gotten in the minute the legislation was passed. Furthermore, when IPOs come out for companies, hedge funds get top billing on the primary market shares - which means investment banks are selling directly to them. Once the secondary market becomes available, hedge funds are up 15-20% on these investments, sometimes within hours.

Finally, you have no capital compared to these hedge funds. The people who invest in these hedge funds are not just the 1%, they are the 0.1%. These are the guys with 500million dollar bank accounts and the ability to do whatever the fuck they want. Hedge funds know this, and they invest without having to care about whether their clients can pay the rent or send their kids to college. All of that is irrelevant. Their sole purpose is to earn money, not to mitigate risk.

What does this all mean? It means the hedge fund industry is making a gigantic proportion of the profits. The top .1% is earning nearly half of the profits in the industry, through not just hedge funds, but other similar vehicles.

The finance industry is a complete scam, designed to funnel money from the 99% investing public into the hands of the top .1%. Sure, some of you will make good money, but stastically, the rest of us will lose, and who is feeding off us? Hedge funds, and the .1%. You have better odds going to a casino and playing slots, the worst-paying game in the house, but still better than the stock market.

Also, the government is in bed with the financial industry. Tax loopholes give hedge funds and other top players the ability to write off losses and not pay taxes on gains for years at a time. For income they derive from the hedge fund (profits), they pay only 15%, rather than the 35% income tax charged to most people earning 80k and above. Meanwhile, you have to pay taxes for not just your own income but also capital gains.

The worst part by far is that the government "encourages" you to put your money into your 401k through 'tax exemptions', which basically puts your money with the lowest tier of the financial industry - pension funds, retail wealth managers, and retail asset managers. These guys have shit strategies like long-only or domestic equity (which means they only invest in American stocks), and have nowhere near the capability and reach of hedge funds. These guys are even more likely to lose your money than you are, and even worse is they will take a 2.35% cut while doing so. And you get penalized when you try to take your money out early. How f***ed up is that.

In other words, if you aren't in the .1%, you have no access to the derivatives markets, you have no access to the special deals that hedge funds and other wealthy investors get, and you have no access to the resources, information, strategic services, tax exemptions, and capital that the top .1% is getting.

If you have any questions about what some of the concepts above mean, ask and I will try my best to answer. I'm a first-year analyst on wall street, and based on what I see day in and day out, I support the OWS movement 100%.

tl;dr: The finance industry funnels money from the masses to the ultra rich, through vehicles like hedge funds which dominate all of the financial markets.

h/t Scott

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SilverIsKing's picture

Gold, silver, nuff said.

Doña K's picture

His message is true and clear. The messenger is not too elloquent. I don't get it. No one can better your odds in a no win situation.

Gold, Silver, Agri-land with good water source, guns and ammo for the next ten years. Real eatate after that.


nope-1004's picture

I remember coming to this same conclusion back in the summer of 2009.  The market made no sense.  Financials started taking off, yet FASB was a complete fraud and farce, enabling only those on the "inside" to syphon more public money from the sheeple believing the headlines.

Any retail investor trading this market is an idiot with their head up their ass, believing in a fairytale outcome.

Market is rigged.  Government is criminal.  Joh Corzine and JPM just stole millions of dollars.  WAKE UP people.  The devil is at work here, keep away from this ponzi.



FEDbuster's picture

But we have Jim Cramer (just kidding).

When the shit really hits the fan, food is the one item you'll want to have plenty of.  Study a little history, and you will find there is always a shortage of food.  As an American who has never known real hunger (and I never want  to), I have many days where I buy in to the "it can't happen here" mentality.  Now I seem to have more "why can't it happen here" days. 

Oh regional Indian's picture

Hhhhh....the real joke fedbuster is that THAT is where it all started. Of course it's happening all along. Right here (there actually, but sometomes I feel like I'm still THERE).

I remember, once I had understood the whole "Accredited Investor" scam, I knew. Strict upward mobility filter. Rich get richer. It's who you know. Money begets money..... etc.



flacon's picture

When I used to work for Merrill Lynch it was an "open secret" that the "derivative group" was CONTRAVERSIAL. I left in summer 2007, 6 months after I knew that... fuck you Stan O'Neal! Yes and I worked for a month for BlackRock when they bought MLIM, fucking bastards! It's all coming down MARK MY WORDS!



Michael's picture

Average income individuals who dabble in the stock market are playing Russian roulette with themselves.

I find it quite funny seeing people blow their own brains out(figuratively speaking) playing in the market. I know a few people who lost well in the six figure range and their life savings to the house. I'm sorry, it's just funny as hell to me to see stupid sheeple losing massive amounts of personal wealth to the market manipulators.

Better to not work extra hours making extra money to dump into the stock market, they'll only steal it from you and you'll have pissed away a large chunk of your life for nothing if that's what you do.  

oldman's picture

if you wanna play

you gotta pay

ucsbcanuck's picture

Here's the problem though - most of my retirement accounts are in cash or CDs. You earn shit returns on those things and government bonds. Maybe the truth is that it's better to be doing things that way than even trying to get involved in the stock market. 

topcallingtroll's picture

Long term usa treasurys have the best thirty year return of any asset class. Why didnt you buy bonds?

Richard russell says the real bull markets are so stealthy no one ever rides them all the way.

I guess he is right.

Who around here is in treasurys? Or was long usa bonds these last thirty years?

ucsbcanuck's picture

And they're overpriced right now, clown.

Confused's picture

Shit returns on cash and CD's is what helps feed the beast, by forcing us to search for higher returns in equities. 


Cash for PMs. My retirement account either won't be worth anything, or I won't make it to retirement. 

Bobbyrib's picture

Bernanke is to blame for why so many retail investors are in the stock market. ZIRP is killing the average saver to the point that they look for another vehicle for higher returns. That's when the stock market comes into play. End the Fed. Let interest rates adjust.

pelican's picture

100% correct Michael.  I am young still, however everything you said was done to me.  Housing Market crash, stock market crash, it is all a lie.  At least I figured this out and have the second half of my life left (I hope)

Never work an extra hour for an employeer.  They will lead you along with a carrort and then eat you for dinner.

Widowmaker's picture

Accredited investor is pinstripe speak for those with an attorney.

Using a Blue Sky Agreement, one may typically get around the fancy language and min net worth bullshit.

It's all bullshit, but one thing for certain is if you want to lose money there is ALWAYS a way in.

Feel richer yet?

The Big Ching-aso's picture



Ya, but in a casino a scantilly-clad babe hands me a drink, wishes me good luck, and winks at me.      

Whenever my wife reads my latest 401k casino statement, she yells at me, calls me an idiot, and gives me the finger.

tooktheredpill's picture

like it


yeah, maybe buy casino equity as well

midtowng's picture

I figure out that the 401k/IRA system was fucked up back in 2003, only after I put in tens of thousands of dollars that are now trapped.

Nevertheless, I figured it out before the bubble, so I don't regret much. I figured out that we were all being lied to, so I bet against whatever the market was pushing. In doing so my assets have multiplied several times over (energy stocks from 2003-2007, and gold from 2002 to present).

The simple fact that I made lots of return on that trapped money by betting AGAINST whatever I was being told just shows how fucked up the market is.

Sophist Economicus's picture

I'm down with the gold and farm land - been acquiring both for years.    That said, this writer is a putz!   I don't believe he works for a hedge fund.   I don't see anything in his incoherent rant that means anything.    For all of the brilliant 'analysts' Goldman has, they go on record being long the Euro and Short the Euro - and on these 'pages' are the butt of jokes.    The we have Paulson with his 'up to the eyeballs' BAC and selling gold to get more, we have a gazillion funds staring at record redemptions, etc.    Two years ago, the entire industry SHOULD HAVE just gone under - some inside information!


Is there dirty dealings going on -- sure there is.   But that will be true anywhere people gather - no matter in what profession.   Spare me the hysteria you snivelling idiot - you probably work for an NGO....

JPM Hater001's picture

"That said, this writer is a putz!   I don't believe he works for a hedge fund.   I don't see anything in his incoherent rant that means anything."

Your belief is never required. A brick wall will stop you whether you believe it is brick or not.

And so has this kids analysis. Seriously, open at least one eye while posting on ZeroHedge.

beaker's picture

I agree w/JPM - this guy is a Putz and a newbie putz, at that. Yes, there are some nuggets of truth here.  True enough about the spreads, and lack of access to exotic derivatives, but so what? I mean, WTF is this we hear all the time about hedge funds blowing up?  How does that happen? I've been a commodity trader for 35 years and here's the truth in this story: All these hedge funds are fucking other hedge funds with all the shit they create and trade. If they had all the answers, they'd have all the money. Go ahead and check out this fabulous track record of hedge funds.  It has de-volved into the S&P 500 returns. Here's the loop:  Manager A finds a market inefficiency and makes money.  He markets the system and track record. Money floods to him.  The system works until he cannot trade the logistics of tens of millions of dollars like he could when he was trading a million dollars. Where he was buying 100 cars, now he's buying 10,000 cars.  Try exiting positions like that and he ends up getting spreads like the pink sheets.  Returns flatten out.  Another system slides into obscurity until the next yahoo comes along. The "house" that is really winning are the managers who collect their 2% annual fee and 20% in a couple of the intermittant good years.  Everyone is picking each other's pockets at all the levels of this game.  It is a zero sum because no wealth is being created.  It's a big circle jerk.  This whole thing is like technology turning on its greedy unethical creators so everything is all fucked up like we have it today.

Indeed, buy farmland to create wealth and store it in gold. There's no counter-party risk.

The Big Ching-aso's picture



I gave ya some green because obviously you really know your shit.


Freddie's picture

Go ahead and check out this fabulous track record of hedge funds. It has de-volved into the S&P 500 returns.


Yup - the vast majority are like scammer Raj Rajarian or whatever that fat f**ks name is.  Stevie C who can afford to buy people off. 

This is also why some of us respect guys like Hugh Hendry, Kyle Bass, Ray Dalio/Bridgewater and maybe Chanos.  Also Marc Faber and Jim Rogers who are not exactly hedgies.   These guys really think. 


dark pools of soros's picture

i agree what you say but you have to take that and apply it to what you said.  Buying farmland was the last 'yahoos' game and the price of good farm land is through the roof and everyone is selling the small farms away...  good luck small guy ANYWHERE even finding choice land under a bridge will be tough for the serfs




 and before you think you can go be a hog or chicken farmer, that is even more fucked


"Many hog and poultry farmers no longer own any animals. The farmers get the chicks and hogs from the multinationals. Even the grain the animals are fed is provided by the company. At the end of the season, the full-grown animals are trucked to the company's processing plants where they're weighed. After rating each farmer's performance in pounds, the company deducts its charges for the chicks or hogs, feed, transportation, and any other services or products it supplied, such as propane to heat the buildings. If there's anything left over, the farmer is compensated. The only thing that the company allows the farmer to own are the heavily-indebted buildings and land where the company raises 'its' animals."



beaker's picture

I have never understood the attraction to livestock.  It is a very tough business model, but I do not call that farming.  Yes farmland prices have been bid up but the market is only giving about a 4.5% cap rate at the high end.  The crazy $16,000/ac" stories tat you read about occur at some rural auction where a couple of neighboring farmers are bidding up a small parcel to square a section.  No serious farmland investor is accepting much under 4%.

Alex Kintner's picture

Well, since Obama opened the door to Selling Horse Meat For Human Consumption, you have an alternative to hogs now. I guess since the Cat Food commission failed, he felt he had to do something.

Scribbles's picture

Great post.

One thing about farmland - there IS counter-party risk when Barry O. confiscates it to create a network of hole-digging communes.

You can, of course, reduce that risk through the purchase of other assets, such as those products available from Smith & Wesson.

Doc's picture

Author is very naive. Funniest part is about the 0.1% the elusive "super-rich".

I've heard of a lot of Hedge Fund Managers who've made it onto the Forbes lists, I ain't never heard of a client making it on there... even the 0.1%.

The author doesn't address a central fact which is even before the 2000s over 75% of active asset managers don't beat their benchmark.


My dislexic aunt who can't even read a fucking income statement or balance sheet has compounded at about 15% a year since the mid 80s buying oil & gas royalty trusts. All she did was reinvest all the income and always check the reserves to make sure the trusts weren't running out of oil in the near future... markets can be outperformed if an investor is dilligent, patient, understands the investment thesis and underlying product, and can bear the volatility. Just don't expect John Paulson type grand-slams (and then grand crashes)...

Look at all the ZH posters who've made money in silver & gold over the past 3, 5, 10 years, taking all the big drops in stride and just building their positions. Again, proof that dilligent and unemotional investors can and do beat the market!

twotraps's picture

agree, thanks for saving me the fucking rant I was cooking up.  Sure, there are differences in cost and access, when was it ever fair??  Love the old story about the vote to bring phones to the NYSE floor.....people were agast, 'then anyone can trade' was the cry, people saw progress and volume/business exploded, you can't go back.     So, now we have super-computers and you get quotes on your iphone.  Not likely we go back in time but it must evolve.  Actually, if you've been in it 35, to my 25, you might remember the $75 fees!  


Hate to see govt intervention and manipulation but at the end of the day I know I don't have all the information, I know I am behind with access but I still have to decide to trade or not.  Still must make risk decisions, deciding not to trade is a trade.  

count_zero's picture

^ +1

Active managers keep most of the alpha for themselves, whether hedge funds or mutual funds. Hedge funds suffer from survivor bias also. After down turns hedge fund managers are stuck with a high water mark to overcome before getting that 20%, so they shutdown.

Don't play the zero sum game. Index! Let others pay for price discovery. If you're concerned about currency risk (as I believe most here are), consider Harry Brown's Permanent Portfolio. (Yes, the same one who ran for president as a Libertarian.)

25% gold (hedges currency risk)

25% t-bills (for interest risk)

25% long-term treasuries (for deflation risk)

25% US stock (eg, VTI, SPY) (for generating wealth)

Four low correlation assets that damp each other, for a slow, steady return. The bond barbell gives higher convexity (lower losses if rates rise) in exchange for a little less yield, vs intermediates.

tooktheredpill's picture

what makes u think that PM's are not manipulated also?

If you don't make a living of it like Einhorn and Greenblatt, focus on earning power and stick it somewhere safe with shite interest. Fucking boring but at least 30 years later you haven't blown a large chunk of it.

yabyum's picture

Gold silver, can't argue w/that. What abot pslv? phys? miners? as tools to turn fiat into the physs?? Miners have been tough(no shit) time to keep some quality and flip the rest in to metals (or a small acerage w/well)

1000pips's picture

Silver is $32.85 an oz.; Gold at $1747...Zero Hedge, and many of you who post here, constantly said many times last year that Gold would be $2500 oz., and Silver well over $100 by the end of 2011.  

Also, you said, the USD was suppose to crash and not be the world's reserve currency by the end of 2011.  

None of this has happened, nor will it.  

The Stock Market will reach new highs in 2012, USD will remain the reserve currency, and Gold and Silver will probably go down in value as 'the end game' never seems to happen and people go on with their daily lives.  

Gold is not a religion, it is a mineral, you buy Gold with Dollars, to wear and show off with, it's 'Bling', not money.

It's time everyone gets back to reality, the world is not going to end, but the Gold bubble is.

RmcAZ's picture

Don't feed the trolls.

1000pips's picture

no troll here, just stating that the predictions of gold being at $2500 by the end of 2011 did not happen, what say you about that?  

Also the USD is still the reserve currency, what say you about that?  

State your logic, oh, you cannot, because now it is a FACT that these predictions of 'the end game' never happened.  What say you about that?  

You are the troll...

nope-1004's picture

Actually, some idiots said gold would be at $500 and silver under $10.

What say you about that?  For a guy that's been a member for 4 weeks, you sure are up on the history of this site.


tooktheredpill's picture

yes, you get idiots on both sides

but c'mon, equities suck so that must mean buy PM's? fuck me

Backspin's picture

You also stated that gold is not money.  That will get you some down arrows around here.

Raphio's picture

You also stated that gold is a mineral. Sorry to inform you that gold is actually an element not a mineral.

1000pips's picture

No my friend, sorry to inform you that GOLD IS A MINERAL...

  1. Gold - Mineral Fact Sheets - Australian Mines Atlas www.australianminesatlas.gov.au/education/fact_sheets/gold.jsp

    Gold had a significant historical role in Australia, which had its first gold rush in 1851 after the mineral was found near Bathurst in New South Wales. ...

  2. google before  you post disputing me, your lack of education can be hidden the less you say,,,

El Gordo's picture

I thought it was an element listed on the periodic table.

1000pips's picture

1. A naturally occurring, homogeneous inorganic solid substance having a definite chemical composition and characteristic crystalline structure, color, and hardness. 2. Any of various natural substances, as:
a. Such as gold or silver. b. An organic derivative, such as coal or petroleum. c. A substance, such as stone, sand, salt, or coal, that is extracted or obtained from the ground or water and used in economic activities. 3. A substance that is neither animal nor vegetable; inorganic matter. 4. Inorganic, such as calcium, iron, potassium, sodium, or zinc, that is essential to the nutrition of humans, animals, and plants. 5. An ore.

Raphio's picture

I stand corrected. I thought I remembered my first year Geology courses correctly  - that minerals are, by definition, composite substances,,ie. compounds. I was not aware that pure elements could also be considered "minerals".

ucsbcanuck's picture

Gold is a metallic element not a mineral.

Eurodollar's picture

Unfortunately people want someone to lead the way so they don't have to think themselves. It is nothing new. Human beahviour! Simple psychology! It's more comfortable commenting: the world is blowing up bitchez, than to actual spend a whole day analyzing whatever subject should have been analyzed.


That said; Tyler is doing a good job by all comparisons. The flow of information here is only good for us "the masses" to digest.

Stoploss's picture


Symbol = AU

Periodic Number = 6

Atomic number = 79

Atomic weight = 196.96654

Element Classification = Transition Metal

Discovered by/Known to the ancients

Discovery Date is unknown

Name Origin = Anglo Saxon: geolo (Yellow); Symbol from Latin aurum (Shining dawn)

Density: (g/cc); 19.3

Melting Point(K) = 3080 degrees Farenheight

Appearance: Soft, Maleable, yellow metal.

Atomic Radius (pm) = 146

Atomic Volume (cc/mol) = 10.2

Covalent Radius (pm) = 134

Ionic Raduis = 85 (+3e) 137 (+1e)

Specific Heat @ 20c j/g mol = 0.129

Fusion Heat kj/mol = 12.68

Evaporation Heat (kj/mol) = ~340

Debye Temperature (K) = 170.00

Pauling Negativity Number = 2.54

First Ionizing Energy (kj/mol) = 889.3

Oxidation States = 3,1

Electronic Configuration =  [Xe] 4f to 14th 5d to 10th 6s to 1st

Lattice Structure = Face-Centered Cubic (FCC)

Lattice Constant (A) = 4.080

Lattice C/A Ratio = N/A


Is there anything else you require?? If so, please call:

1-800- i-donthaveafuckingclueaboutpmsorhowtosatisfymywifeinanywayshapeorform.

Thank You from our readership, for your concern, we do not need your help. (We have better computers)


Stoploss's picture

Gold is a metallic chemical element.  See above. pips is retarded.

J 457's picture

I'm old enough to recognize that this time its not business as usual. The USD reserve has never been under as much pressure as it currently is today. The debt @ 15 trillion, the 1.4 trillion annual deficit and 600 billion trade gap. Look back only a short decade ago and see the huge disparity from today.

Yes, the world and the US will continue, but I firmly believe there will be significant change in the next 2-5 years. Our current path is not sustainable and no amount of deficit reduction or tax increases will be enough to satisfy the debt without smothering our service comsumption driven ecomony. We're now in a tight corner.....

The Navigator's picture

Quite correct J 457 - Exponential numbers - Chris Marenson at http://www.chrismartenson.com/crashcourse does a great job explaining how things seem ok untill the last second, when number go exponential and then BANG, its over.

Don't be dissapointed when you think "WTF, it shsould have happened by now" - ZH is way ahead of the curve, 6 months to a year ahead - a better (not perfect) crystal ball once you understand the timing aspect of ZH.