Alternative Investment Schemes – What really happened?

The recent collapse of the alternative investment scheme Cash Plus and now Olint, with losses estimated as high as $200 billion, has a lot of people asking the question: What has happened? Some persons believe that it was the formal financial sector which brought down the schemes. They say that the sector was concerned about losing funds to the informal sector and conspired to bring about it’s downfall by pressuring the financial services sector to close down the companies.

Others believe that the companies were nothing more than pyramid schemes. A pyramid scheme operates on the basis that money is paid out of new proceeds being received and not on any earnings that are generated. This scheme obviously will depend on people continuing to bring in new money which will only happen as long as there is confidence in the scheme. Of course given that no income is being generated, it will inevitably fail.

While I applaud the efforts of the companies to spread the wealth around, they failed to use some basic investment strategy. In the case of Cash Plus they forgot that you do not use short term money to invest in long term assets such as businesses and property. Secondly, both companies breached the rule that if you are taking money from persons you must be able to account for it by refusing to present financial statements. One of the main aims of this blog is to inform readers about basic investment strategies and to promote discussion on current happenings.

Feedback question: Are Carlos Hill and David Smith heroes or villains?