Hawkin's Round Trip Fallacy

Mr. Hawkin knows very well how to play (maybe he does not really play). Once he wrote there is a God and Millions of copies of his book were sold, now he claims on the contrary but confusing no evidence of Heavens/God with evidence of no heavens again. A big round trip fallacy which seems to be very delightful for many, and once again will turn him into another bestseller. Once I have read this quotation somewhere: "Without education we are in a horrible and deadly danger of taking educated people seriously" and as time passes, I realize it is the most plausible justification for getting educated.

Regulatory Paternalism and its Unanticipated Consequences

One of the ironies of the modern word is the unwanted and unanticipated (who knows?) consequences of the regulatory intervention in economic activities. One of these consequences is in the securities regulation in which regulators had hard times regulating recently. Regulators are supposed to protect investors and one of the mechanisms of investor protection is the disclosure requirements in public offerings. They think that the disclosure of information will protect the investors while many unsophisticated individual investors cannot make heads or tails of the disclosed information. I do not like to focus on this issue, what I would like to discuss is the problems arising from the paternalistic approach of the regulators. As I said, this disclosure requirement is limited to public offering while laws and Regulations made some exceptions to this general requirement and one of those exceptions is the private placement.

As defined in the famous case of 1953 SEC v. Ralston Purina Co. "a transaction not involving a public offering" is "an offering to those who are shown to be able to fend for themselves." Who is able to fend for himself, SEC Rule 501 (a) defines such a person as an "accredited investor". Accredited investor is any "natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000”; any “natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year”; plus executive officers and directors of the issuers.

There are some other details into which there is no need to enter. The hedge funds and private equity funds are among those issuers of securities taking advantage of the above mentioned provisions who can sell securities to accredited investors. Having a quick look at the hedge funds returns and a quick comparison of their overall returns to S&P 500 and other indices returns reveal that hedge funds either in times of economic prosperity or in times of turmoil earns much more and lose much less than other indices. It means that both in upturns and downturns they outperform the market. Thanks to the SEC/securities regulation which does not restrict the hedge funds and some other private equity funds' strategies while doing so for other financial institutions. Taking advantage of this laxity in regulation for hedge funds and more stringent regulation for other financial institutions, hedge funds are able to have better risk management strategies because a wide variety of the financial strategies, especially short selling mechanism, at their disposal, .

Anyhow, the hedge funds outperform the market with having a helping hand from regulators who create an economic rent for them. The irony is that only the so called "accredited investors" can invest in these funds and general public are banned from investing in them. It means that if you are poor, you cannot invest in them and have higher return on your equity, but if you are rich enough, you can do so and get increasingly richer than the poor in market upturns and in the market downturns lose lot less than the poor does.