What's Wrong With Billionaire Fund Managers?

Wednesday, April 16, 2008 | 07:00 PM

20080416_wall_graphic An article on humongous hedge fund paydays in today's NYTimes was quite interesting:

"The richest hedge fund managers keep getting richer — fast. To make it into the top 25 of Alpha’s list, the industry standard for hedge fund pay, a manager needed to earn at least $360 million last year, more than 18 times the amount in 2002. The median American family, by contrast, earned $60,500 last year.

Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers’ own pay and excludes the compensation of their employees. Five of the top 10, including Mr. Simons and Mr. Soros, were also at the top of the list for 2006. To compile its ranking, Alpha examined the funds’ returns and the fees that they charge investors, and then calculated the managers’ pay."

This is exactly the sort of thing that makes my liberal friends crazy. It shouldn't, but it does.

And, I make it even worse, by pointing out to them that if they thought it through, they should have no problem with the John Paulsons, (Paulson & Company), James H. Simons (Renaissance Technologies) and George Soros (Quantum Fund) of the world. These 3 earned a neat ~$3 billion apiece last year.

And by earned, I mean these guys earned it. They have figured out how to make money for their partners and clients. Their skill sets add value. There have always been people in the world who had vast amounts of wealth -- earning it legally through your own cleverness and hard work should not be a problem. Dictators, Robber Barrons Sultans, and Anti-Trust violators are a different story.

I believe it is misdirected energy to rail against that.

On the other hand, there are plenty of bad actors they should be truly upset about instead. Stan O'Neal of Merrill Lynch (MER), Chuck Prince of Citigroup (C), Robert Nardelli of Home Depot -- any many, many more undeserving cads -- are value destroyers. And they got paid an absurd amount of money to help destroy the very companies they were brought into run. If you have a retirement account (IRA, 401k, Pension plan) then they took money from you. That is unconscionable to me.

How did billions in shareholder money get transferred from S/H to departing schmucks?

The short answer is Crony capitalism. They have (had) do-nothing-boards who failed to watch out for the shareholders' interest. I sit on the Boards of 2 public companies, and I am very conscious of who my constituency is. Remember, Board of Director members are elected by, and work for the Shareholders -- not for insiders, not for management. Whenever a BoD cuts a deal with one of these they become diminishers of value, they are not only failing in their fiduciary duty to the shareholders, they are essentially converting corporate assets private ones for their buddies.

This used to be known as stealing . . .


UPDATE: April 17th, 2008 5:21am

I think people are overlooking something:  These guys are the top 0.01% of their industry -- they ARE the Michael Jordan and Steve Jobs of their industries.

What they create are investment returns -- something that many hedge fund managers do not. In fact, about 25% of funds  are dissolved each year due to poor performance and the unlikelihood of manager compensation (courtesy of the high watermark).


Wall Street Winners Get Billion-Dollar Paydays
NYT April 16, 2008

Wednesday, April 16, 2008 | 07:00 PM | Permalink | Comments (89) | TrackBack (1)
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» Hedge Fund Compensation from The Big Picture
Earlier this week, I asked, What's Wrong With Billionaire Fund Managers? In noted the very top % of this profession carried enormous compensation for those Alpha creators who earned tremendous returns for their partners. Most of the top earners are als... [Read More]

Tracked on Apr 20, 2008 8:05:05 AM


Um, I am hardly liberal, and in fact generally an economic conservative. However, as I understand it, hedge fund managers get away with paying the 15% capital gains tax on the majority of they're income. It is total B.S. that the richest of the rich basically pay a lower tax rate than all of us peons, and for what? trading? I mean, COME ON! If they were like Bill Gates and created a big company that employs lots of people it wouldn't bother me that they get away with some poultry tax rate. (Employing traders at the hedge funds is not quite the same thing as creating a Microsoft or a Google or a Monsanto). It also annoys the living crap out of me that the wealthy don't have to pay the Social Security tax on all their income and then I hear whining about how high their tax rate is.

Like I said, I consider myself to be mostly an economic conservative (except perhaps on taxes), and I plan to vote for McCain, but I'm not going to be too disappointed when Obama raises all these taxes.


BR: I don't disagree with you about the taxes -- but thats not what this discussion is about.

Posted by: Joe | Apr 16, 2008 7:14:15 PM

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