25 richest hedge Fund Managers Average $464 million each

[Chris Coles]

25 Richest Hedge Fund Managers
Times may be tough, but not for the top 25 earners who made Alpha Magazine’s eighth annual list of the world’s best-paid hedge fund managers. The top moneymakers earned, on average, $464 million each in 2008.

http://www.iimagazine.com/Alpha/Arti..._Managers.html

[GRG55]

Re: 25 richest hedge Fund Managers Average $464 million each

25 Richest Hedge Fund Managers
Times may be tough, but not for the top 25 earners who made Alpha Magazine’s eighth annual list of the world’s best-paid hedge fund managers. The top moneymakers earned, on average, $464 million each in 2008.

http://www.iimagazine.com/Alpha/Arti..._Managers.html

But unlike the AIG executives and so many, many others, these folks made astute bets, in a treacherous market, and won, did they not? If they had been wrong would they have been paid so much? I think not.

The one thing about this mess is that the bloated hedge fund industry is going through a Darwinian experience [unlike the too big to fail financial sector, where everybody lives even if that means bleeding the rest of us dry]. These hedge fund managers are more likely to be among the limited number of survivors of this process, and that's fine by me. I just wish the world's governments would apply the same criteria to the failed institutions they have nationalized in every way except the ability to exercise any real control.

The recent public cries of "betrayal" and so forth coming from some AIG executives is laughable. Reminds me of Enron. When that darling of Wall Street company collapsed, every single head of every single Enron department and subsidiary went out of their way to explain how their department outperformed, and they couldn't possibly be penalized for the failure of the company [...must have been that other guy's fault...]. Riiiight...

[marvenger]

Re: 25 richest hedge Fund Managers Average $464 million each

I can't remember the name of the guy who made a billion or something stupid and then got out writing a letter saying what corrosive industry it was. Fact is money's not supposed to be that easy to make, EJ and a few others could have had a good crack at it with others money I'm sure. The system was that sick that it was giving money to hedge fund managers just to keep it going. Institutions benefit those who run them and those in control of the world economic functioning, please don't take me too literally here, were willing to do some crazy stuff to keep in control of the system. The hedgie couldn't cope with their generosity. Maybe when he realised it was the taxpayer that was going to have foot the bill of the rediculous bets designed to create the illusion of solvency it all became too much for him.

Anyway, I guess I'm saying they didn't really earn it, someone offered it too them and they took it, but it wasn't really an arms length transaction. And some of the filthy rich couldn't even cope with the immorality of it.

[flintlock]

Re: 25 richest hedge Fund Managers Average $464 million each

I don't really know anything about hedge fund manager compensation. That said, I think the problem may lie with the "heads I win, tails you lose" way our current system seems to work. People stand to gain hundreds of millions, but do they risk anything substantial? Usually not. Too much of that goes on in all sectors.

As we've seen with Credit Default Swaps, we have a system where people are allowed to risk money they don't have . It's not just gambling, its gambling and then not paying up. In some sectors of society that would get your legs broken or worse. You can't have a financial system that out of balance that allows such huge rewards without being balanced by a corresponding risk. Do Hedge fund managers invest their own money?

Same goes for corporate compensation. I think all bonuses past a reasonable point should be in common stock only, not cash. Put a 5 year window on selling the stock. If the executive is in fact "acting in good faith", his stock will be worth more. If he's just playing the system it won't. People need a vested interest or they'll simply manipulate the system to put cash in their pockets short term at the expense of the long term health of the company. GM is a perfect example of this.

But I really don't know how we stop unscrupulous people from continuing to play the system to their own benefit. At some point people either wise up and stop giving them their money or they just lose it. The real crime is that the government then steps in and bails out these fools.

[llanlad2]

Re: 25 richest hedge Fund Managers Average $464 million each

[quote=GRG55;86698]But unlike the AIG executives and so many, many others, these folks made astute bets, in a treacherous market, and won, did they not? If they had been wrong would they have been paid so much? I think not.

I disagree.

Not one of them "earned" 425 million dollars so how can they deserve it?

I imagine a fair number of follks who read itulip and had 10 billion of other people's money to go short in December 08 would have been able to "earn" the same.

What have they produced, made or sold to earn this money?

[GRG55]

Re: 25 richest hedge Fund Managers Average $464 million each

[quote=llanlad2;86705]

But unlike the AIG executives and so many, many others, these folks made astute bets, in a treacherous market, and won, did they not? If they had been wrong would they have been paid so much? I think not.

I disagree.

Not one of them "earned" 425 million dollars so how can they deserve it?

I imagine a fair number of follks who read itulip and had 10 billion of other people's money to go short in December 08 would have been able to "earn" the same.

What have they produced, made or sold to earn this money?

They earned it by betting against the idiots that are managing YOUR money...your elected politicians, who are now spending all you've ever earned, and all your children and your children's children will ever earn.

If you had a choice [not that you have any more...:rolleyes:], which of these two options would you prefer?

[marvenger]

Re: 25 richest hedge Fund Managers Average $464 million each

you guys are all free market idealogues. It ain't a free market. They didn't earn it. Your kidding yourself if you think otherwise. America is not the land of the free and never has been. Has some great points, but your living in fantasy land.

[bpr]

Re: 25 richest hedge Fund Managers Average $464 million each

Not one of them "earned" 425 million dollars so how can they deserve it?

I imagine a fair number of follks who read itulip and had 10 billion of other people's money to go short in December 08 would have been able to "earn" the same.

What have they produced, made or sold to earn this money?

Hedge fund managers earn a performance fee, typically something like 20% of all gains, on top of their standard compensation, which may be 1-2% of all assets. So, the manager of a $5 billion fund that returned 20% ($1 billion) in 2008 will make about $200 million in performance fees, plus standard compensation of, say 1% of $5b, which is $50 million, for a total compensation of $250 million.

A different manager managing the same fund that lost 20% would only get 1% of the $4 billion, about $40 million.

If you invested a million in each fund, you would probably not mind the 20% performance fee that went to the guy that made money in last year's down market.

The figures vary by fund, I'm usung a 1%/20% structure for ease here. This is all theory, of course, and the manager that lost a billion may sacrifice a hefty portion of his 1% in good faith to retain clients.

Aside from the structural imbalances of the entire enterprise, a major problem is that these earnings are not treated as income by the tax code. They are taxed as capital gains, thus subject to the 15% LT cap gains rate, rather than the highest tax bracket, which they should be considered. So, the top 25 manager that made $464 million last year paid taxes as if he were in the $35,000 bracket. Here's an article.

Now, 25 manager averaged $464 million, totalling 11.6 billion. Assuming they even paid taxes on all of this, they were taxed at 15%, instead of 35%, which amounts to a $2.3 billion tax break for 25 individuals in a single year. That exceeds the uproarious AIG bonuses by a factor of 14.

Now, get angry.

EDIT: Last year the average was $892 million, so the tax break was over $4.5 billion.

[Munger]

Re: 25 richest hedge Fund Managers Average $464 million each

you guys are all free market idealogues. It ain't a free market. They didn't earn it. Your kidding yourself if you think otherwise. America is not the land of the free and never has been. Has some great points, but your living in fantasy land.

I'm sure these managers are highly competent investors, but the fact is that when you manage the kind of money they do and take 20% of alpha, about half of the fund managers are going to beat the average performance... so it's pretty tough to say whether they "earned" it or not. I think James Simon, for one, consistently outperforms (if you look into his fund, they are supposedly using elite quants and the scientific method ... but are obviously not very forthcoming about the details of what it is they do). Here's another successful strategy:

Hedge fund risk

Psst-- want to earn a 41% annual return over a decade? Then read on.
Originally, "hedge fund" was used to describe a fund that simultaneously buys and sells related securities, constructing a portfolio with desired risk-return characteristics or profiting from subtle differences in returns.


Today, the term may refer more broadly to any unregulated private investment pool that adopts unconventional or aggressive investment strategies such as short selling, leveraged positions, program trading, swaps, arbitrage, and derivatives trading.


The Big Picture calls attention to this story from this weekend's New York Times:

Mr. Simons, who got into the hedge fund business after abandoning a stellar career in mathematics, has a track record that is jaw-dropping.... from 1990 to 2004, Renaissance's primary hedge fund, called Medallion, has delivered annualized returns of 33.21 percent. (The Standard & Poor's 500-stock index has returned, on average, 10.98 percent during those same years.)

I do not know anything about the investment strategy of Renaissance or Medallion. But let me tell you about one fund I do know about called CDP, which was described by MIT Professor Andrew Lo in an article published in Financial Analysts Journal in 2001.


1992-1999 was a good time to be in stocks-- a strategy of buying and holding the S&P 500 would have earned you a 16% annual return, with $100 million invested in 1992 growing to $367 million by 1999. As nice as this was, it pales in comparison to CDP's strategy, which would have turned $100 million into $2.7 billion, a 41% annual compounded return, with a positive return in every single year.


Want to learn more? CDP stands for "Capital Decimation Partners", a hypothetical fund created by Professor Lo in order to illustrate the potential difficulty in evaluating a fund's risk if all you had to go on was a decade of stellar returns. The strategy whereby CDP would have amassed a hypothetical fortune was amazingly simple-- it simply sold put options on the S&P 500 stock index (SPX).


Buying put options is a way that an investor can buy insurance against the possibility of a big loss. For example, the S&P 500 index is currently valued around 1250. You can buy an option (the 1150 March 2006 put) that will pay you $100 for every point that the S&P is below 1150 on a specified date in March. Such an insurance policy would today cost you about $750. If you've bought enough puts to balance the equity you have invested long, you have nothing to fear if the market goes below 1150, because every dollar you lose on your main holdings you can gain back from your put option.


But what about the person who sold you that put? They have now assumed all of your downside risk. Lo's Capital Decimation Partners would use its capital to meet the margin requirements (which guarantee to the exchange that CDP could in fact make the payments to the buyer of the put), and roll over the proceeds to make even bigger bets. Essentially it was thus using leverage to turn the relatively small proceeds from selling these puts into a huge return on the capital invested.


Of course, if you play that game long enough, eventually the market will make a big enough move against you that your capital used to meet margin requirements gets completely wiped out, giving you a long-run guaranteed return on your investment of -100%. But over the 1992-99 period, Lo's hypothetical fund dodged that bullet and ended up turning in a whopping performance.


Lo gives a variety of other examples of funds that could go for a long period with very high returns and yet entail enormous risks. They all have this feature of pursuing investments that have a high probability of a modest return and a very small probability of a huge loss. By leveraging such investments, one can achieve a very impressive record as long as that low probability disastrous event does not occur. It is certainly possible that some strategies along these lines would, unlike Capital Decimation Partners, earn a higher return than the market on average if you stuck with them forever. However, you should view that higher return as coming at the expense of much higher risk.


My discussion of Lo's hypothetical hedge fund should not be construed as a specific critique of any currently operating actual hedge fund. But suppose that all you know about a fund is that it has earned exceptional returns every year for the last decade, and you don't have access to information about the specific trading or asset holding strategy that netted those returns. Is it a good investment for your money? My advice would be no.

http://www.econbrowser.com/archives/...fund_risk.html


I am not going to say that investors shouldn't be allowed to give their money to hedge fund managers, but taxing them at less that their secretaries is absurd. But the most interesting article about the game has to be the story of the Hadrocks and Gotrocks, by a little known investor:

HOW TO MINIMIZE INVESTMENT RETURNS

It's been an easy matter for Berkshire and other owners of American equities to prosper over the years. Between December 31, 1899 and December 31, 1999, to give a really long-term example, the Dow rose from 66 to 11,497. (Guess what annual growth rate is required to produce this result; the surprising answer is at the end of this section.) This huge rise came about for a simple reason: Over the century American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments.

The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company's losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic-- no shower of money from outer space-- that will enable them to extract wealth from their companies beyond that created by the companies themselves.

Indeed, owners must earn less than their businesses earn because of "frictional" costs. And that's my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.

To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We'll call them the Gotrocks. After paying taxes on dividends, this family-- generation after generation-- becomes richer by the aggregate amount earned by its companies. Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.

But let's now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers-- for a fee, of course-- obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family's annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.

After a while, most of the family members realize that they are not doing so well at this new "beat-my-brother" game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he'll never outsmart the rest of the family. The suggested cure: "Hire a manager-- yes, us-- and get the job done professionally." These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.

The family's disappointment grows. Each of its members is now employing professionals. Yet overall, the group's finances have taken a turn for the worse. The solution? More help, of course.

It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock-pickers. Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don't suggest it to them.

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group-- we'll call them the hyper-Helpers-- appear. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because of the existing Helpers-- brokers, managers, consultants-- are not sufficiently motivated and are simply going through the motions. "What," the new Helpers ask, "can you expect from such a bunch of zombies?"

The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with self-confidence, the hyper-Helpers assert that huge contingent payments-- in addition to stiff fixed fees-- are what each family member must fork over in order to really outmaneuver his relatives.

The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.

And that's where we are today: A record portion of the earnings that would go in their entirety to owners-- if they all just stayed in their rocking chairs-- is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses-- and large fixed fees to boot-- when the Helpers are dumb or unlucky (or occasionally crooked).

A sufficient number of arrangements like this-- heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so-- may make it more accurate to call the family the Hadrocks. Today, in fact, the family's frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, "I can calculate the movement of the stars, but not the madness of men." If he had been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Here's the answer to the question posed at the beginning of this section: To get very specific, the Dow increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3% compounded annually. (Investors would also have received dividends, of course.) To achieve an equal rate of gain in the 21st century, the Dow will have to rise by December 31, 2099 to -- brace yourself -- precisely 2,011,011.23. But I'm willing to settle for 2,000,000; six years into this century, the Dow has gained not at all.


Warren E. Buffett
28 Feb 2006

[bpr]

Re: 25 richest hedge Fund Managers Average $464 million each

Here's the answer to the question posed at the beginning of this section: To get very specific, the Dow increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3% compounded annually.

Interesting stuff.

12/31/08: Dow 8,776
4.585% compunded from 12/31/1899 by my calculation.

[Chris Coles]

Re: 25 richest hedge Fund Managers Average $464 million each

Common sense dictates that if you play a ball game between two people, the game can only create winning points at the speed of play, so take that analogy and relate it to two computers trading at the speed of light between them, while, interestingly, having no contact with the real world outside, can create winning points that bring in a billion or so income per year. No industry, no products, no employees, nothing but two computers....

However, increasingly, they are the only people able to get their hands on capital and slowly, but surely, the whole thing has reached the point of collapse. A very close parallel to the oft quoted problem with single species anywhere else. Something goes wrong, single species dies and no one has anything to follow up with.

[llanlad2]

Re: 25 richest hedge Fund Managers Average $464 million each

The Warren Buffet piece frames it perfectly. The fund managers are never earning money- only sucking away the earnings of others.

Eventually there are no earnings left and they go bust.

It's semantics.

No one who has gotten rich through asset price inflation has "earnt" it.

We just have to hope that the FIRE can be put out peacefully.

[kartius919]

Re: 25 richest hedge Fund Managers Average $464 million each

The 20% carry interest gets preferential capital gains treatment. Ain't that a bloody hoot. And no, it is not a profit interest. It is a f*ing contingent fee but those asshole IRS just like the SEC are in cahoots with the hedgies.

[btattoo]

Re: 25 richest hedge Fund Managers Average $464 million each

Precisely. This tax policy, along with mortgage interest deduction (see link) are a couple good examples of Congress incenting the wrong behavior. Although "wrong" depends on your perspective. If you're a FIRE-head, these were great policies.

http://economix.blogs.nytimes.com/20...ge-deductions/

Aside from the structural imbalances of the entire enterprise, a major problem is that these earnings are not treated as income by the tax code. They are taxed as capital gains, thus subject to the 15% LT cap gains rate, rather than the highest tax bracket, which they should be considered. So, the top 25 manager that made $464 million last year paid taxes as if he were in the $35,000 bracket. Here's an article.

Now, 25 manager averaged $464 million, totalling 11.6 billion. Assuming they even paid taxes on all of this, they were taxed at 15%, instead of 35%, which amounts to a $2.3 billion tax break for 25 individuals in a single year. That exceeds the uproarious AIG bonuses by a factor of 14.

Now, get angry.

EDIT: Last year the average was $892 million, so the tax break was over $4.5 billion.

[pescamaaan]

Re: 25 richest hedge Fund Managers Average $464 million each

did it bother anyone two weeks ago when Manny Ramirez finally accepted a 2year contract worth $45million from the Dodgers? This after having been paid over $160million by the Boston Red Sox during the previous 8 seasons?

or what about the fact that Alex Rodriguez had a contract for $250million with the Rangers/Yankees - all the while pumping himself full of drugs to perform the way he did?

or what about the $20-30million per movie that A-list actors and actresses get paid for their staring roles?

my point is, at what level is this money earned vs not earned? Why is Manny Ramirez's money earned, but not Jim Simmons?