

Last year, 25 hedge fund managers earned a combined $22 billion - ecounysis
http://www.economist.com/blogs/freeexchange/2011/04/money?fsrc=scn%2Ftw%2Fte%2Fbl%2Fnotbadworkifyoucangetit

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makecheck
Some corporations go pretty far to save money (reducing workforce, etc.), all
apparently in the name of keeping investors happy. Shouldn't there be
investors in banks asking questions about these managers' salaries?

If I were a major shareholder, the first thing I'd demand is that a test of
managers' worth be done. Set up a few theoretical funds with spreadsheets,
full of what-ifs such as how much money is invested in total, and with goals
for each fund (such as a certain amount of gain, or safety). Then, take some
people with minimal finance experience, like new college grads, and pay them
$50000 a year each; pit them against the hedge fund managers for the same
funds.

For a few months, everyone has to try to work those fake funds; they must use
real market values and suggest decisions based on real data, but obviously the
funds contain no real money and the effects would just be calculated. Here's
the best part: since the real managers are making over 100 times what the
grads would make, they had better have some pretty damned impressive results.
If the grads come _anywhere near_ what the managers do, the managers will
automatically have their pay docked accordingly. In other words, if they
aren't astronomically better when applying their "experience" to a few simple
tests, why the hell would any investor continue to tolerate paying these
managers so much?

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orijing
I think it's partially because they manage _so much money_. I agree that
they're overpaid, but maybe their funds don't think so.

Let's take a hedge fund manager who's making $10m a year. If he's managing a
$5b fund, even if his performance is 0.2% better than that of someone who
works for free, he has "earned" that $10m in terms of value added.

Now, why they charge over 1% is another question...

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karzeem
> AR Magazine said Mr. Shaw, who gave up day-to-day oversight of [D.E. Shaw's
> funds] in 2002, made the list because the firm charged a 3 percent
> management fee and took 30 percent of the investment gains.

What's the justification for management fees at all, let alone such a steep
one? Their cut of the profit in fat years should be enough to keep the doors
open in lean ones. Such fees also create a perverse incentive to simply get as
much money under management as possible.

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cynicalkane
_What's the justification for management fees at all, let alone such a steep
one?_

The justification is that people are willing to pay it.

Of course, you're probably asking not whether people pay it, but whether it's
a fair price. The answer is no in general; hedge funds historically have
underperformed the market.

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karzeem
You're of course right. I'm questioning whether it's a wise price to pay. A
lot of funds' results take a big hit once you account for fees.

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jtbigwoo
If they charge such massive fees, why do rich people continue to invest in
hedge funds? Is it simply a luxury pastime that might occasionally pay off big
like collecting art or antique cars?

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hugh3
Basically, they continue to invest in hedge funds because hedge funds keep
producing huge returns. These are the folks who operate the supercomputer-
powered vacuum cleaners that suck all the arbitrage out of the market.

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nickbp
Yet they still manage to under-perform year after year.

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PatrickTulskie
They under perform compared to the market as a whole but the people who put
their money into a hedge fund don't care about that. They are not able to get
the same returns a hedge fund can get on their own.

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phamilton
You also need to think about opportunity cost. While many smart people can do
the research and figure out how to maximize returns, often it's worth the
lower return to to have to worry about it. The time you would spend micro
managing the investment just may not be be worth it to many people. Their time
is better spent doing other things.

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prodigal_erik
Isn't the purpose of a hedge fund to reduce the total variance in investors'
portfolios? Shouldn't they be evaluated by non-correlation rather than
comparative returns?

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nickbp
These days it's just a label which allows them to largely avoid the SEC.

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ecounysis
It is hard for me to imagine a scenario where they (on average) each created
$880 million in value to society.

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ecounysis
I am sure that on average they created at least $880 million of value to
society to make up for the $880 million of resources they were compensated
with.

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hugh3
There's a reason sarcasm is called the lowest form of wit. It's much easier to
sarcastically say _P_ than to put forth a logical argument for _not-P_. And
it's really rather annoying, because if you _do_ happen to believe _P_ (or
some moderate point of view between _P_ and _not P_ ) then a sarcastic comment
gives no actual hook to start a discussion.

That is why I think comments like yours should be discouraged.

~~~
ecounysis
Sorry. Thanks for the feedback.

