8 ms·

If they are providing their customers at least 10x that value then what's the problem? Customers decide, or do we want to go back to the Middle Ages and leave d

by kfk 10y ago

If they are providing their customers at least 10x that value then what's the problem? Customers decide, or do we want to go back to the Middle Ages and leave decisions up to kings? One way or the other somebody is going to manage huge wealth, I prefer the first because in this case at least that somebody is not there because of born rights. By the way, want to lower salaries of hedge fund managers? Make great startups that: 1. provide serious automated financial tools for investors; 2. make this financial stuff so that it can be used by everybody on the planet, not only by US currency holders

danieltillett 10y ago
The same argument is what drug dealers and pimps use.
bertil 10y ago
I think the concern is over what you mean by “providing”: some would say that it seems unlikely they actually create that value as much as they confiscate it. Preventing that was what made kings popular, until we improved on who should control the police.
teekert 10y ago
I think the problem is that they generate so much money without making anything of value. They just shift money around and with that, extract money from the economy, money that represents value generated by someone who made something that other people gladly pay for. I'm probably just to poor at economics but if someone could explain the use and benefit to society of these hedge fund managers, that would be great. If they simply extract value by some complicated process of obfuscation, we should vote for a system where they don't exist.
- growse 10y ago
  They literally generate value for their investors. A waiter in a restaurant is just shifting money around without 'making anything of value' - should we vote him, and the entire service economy, out of existence as well?
  - peonicles 10y ago
    The waiter provides a service in exchange for money. Hedge fund managers literally move money around. Their value add is debatable.
    - growse 10y ago
      They move their investors' money around, thus providing a service to their investors, in exchange for money. I'm not sure I see the difference.
- chrisseaton 10y ago
  > they generate so much money without making anything of value If they aren't making anything of value then why is anyone paying them? Clearly they are making something of value in someone's eyes. Or by 'making' do you mean literally manufacturing? If so do you not value the work of doctors? They don't produce any goods either. > if someone could explain the use and benefit to society Why does everything have to be objectively useful and beneficial to the whole of society? Why can't we judge things based on the simple question of 'is something willing to pay for it with their own money'. Here they are, so it's clearly useful and beneficial to someone.
  - exit 10y ago
    > Why can't we judge things based on the simple question of 'is something willing to pay for it with their own money'. because that's a lie? people pay for certain financial services because their options are systematically oppressed. what we're complaining about in this thread is how the structure of the system artifically captures "value". what would happen if we applied the same simple judgement to heroin dealers? there are clearly many people willing to pay them.
  - kisstheblade 10y ago
    But isn't trading a zero sum game? Somebody's wins are another's losses.
  - Nrsolis 10y ago
    And yet there are a thousand juvenile games on the Apple App Store making millions.
    - stepanhruda 10y ago
      no one is saying those provide anything of value
  - teekert 10y ago
    The fact that someone is willing to pay someone else to find ingenious, opaque methods of scraping value from society without producing anything in return, does not make it ethical.
- Nrsolis 10y ago
  If you don't think investing billions of dollars skillfully such that you don't lose any of it and earn a risk-adjusted return that's better than your peers is valuable then maybe you should try it sometimes. These guys manage money for hundreds of thousands, if not millions of people who are counting on that money being there for their retirement or families. If a hedge fund manager earns $1 billion, you can be assured that he grew his customers investments by something like $4 billion. For every guy that makes $1 billion, there are a thousand or more that don't get anything close to the salary that a medium-salaried employee at a decent startup gets because they LOST their investors money.
  - oarsinsync 10y ago
    > If a hedge fund manager earns $1 billion, you can be assured that he grew his customers investments by something like $4 billion. > For every guy that makes $1 billion, there are a thousand or more that don't get anything close to the salary that a medium-salaried employee at a decent startup gets because they LOST their investors money. Given the 2/20 rules that a lot of funds follow, that's not strictly true. If you're managing a $10bn fund, and working on 2/20 (2% fee, 20% performance), you're taking $200m off the front just for managing the money. Regardless of profit or loss, you've got that money. You're then taking another 20% off of any profits you're making, when you're making them. And then keeping them even if you end up losing money the next quarter, that money's still yours.
    - Nrsolis 10y ago
      That 2% is what you'd get charged by ANYONE with the skill and operations to manage that level of money.
      - oarsinsync 10y ago
        > That 2% is what you'd get charged by ANYONE with the skill and operations to manage that level of money. Also not strictly true. Some of the large funds with (confidence in their ability to perform|managing enough money to not care about massive performance anymore) operate on 1/20 rather than 2/20.
asmithmd1 10y ago
Not close to 10x, according to the article he took as a salary about 1/3 of the returns from all investor capital. The fund returned 14.3% last year and he was paid 6.8%
akie 10y ago
3. Or maybe we can tax them at, say, 90% for every dollar earned over $50 million/year and use the proceedings for the common good?
- deleted 10y ago
  [deleted]
- retube 10y ago
  As if any institution would remain in a jurisdiction that levied 90% tax.
  - extra88 10y ago
    We're talking about personal income tax, not corporate tax. Other countries have high rates and most of the rich stay, the U.S. used to have rates that high for the wealthiest [0] and they stayed. [0] https://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_top_rates https://en.wikipedia.org/wiki/Income_tax_in_the_United_State...
    - charlesdm 10y ago
      They would take out a few hundred million in earnings before the tax is introduced, so they would never have to take money out again. France introduced a 75% tax in 2012 (or 2013) on income above €1m, and it drove away significant amounts of wealthy residents.
    - whatok 10y ago
      You mean rich people decided to stay in the US during wartime instead of chancing it somewhere else.
      - extra88 10y ago
        Look again, the top bracket was 91% from 1946 until it was lowered to 77% in 1964, after WWII. I'm not declaring what the best top tax bracket should be, I'm countering the dismissal of much higher tax brackets as fantasy with facts that they have existed. Today, many countries in Europe have a top income tax bracket at or above 50% plus a VAT of 20-25%.
deleted 10y ago
[deleted]
Scarblac 10y ago
I don't believe a single hedge fund manager can personally contribute $5 billion per year in value. Some of the people in this list managed funds that lost money, so they obviously didn't.
- Mtinie 10y ago
  Alternatively, there could be a case to be made that while losing money for their clients they ended using losing less than a competitor would have. Whether this is true or not is highly dependent on a lot of externalities, but I can envision a situations where this would be worth something to a client.
- calgoo 10y ago
  they lost their customers money, it does not say if their firms lost money... At least thats what I see / hear when these "losses" appear.
- bluecalm 10y ago
  Maybe they made good decisions and lost money. Let's say I have a million to invest. I value an expert making investment decisions with that million at $10,000 per year. There are many others like me so the manager collects many millions to make decisions with. They doesn't guarantee the money will be made, they just guarantee they will make the best decisions they are able to with that money which has higher expected return than me making those decisions. It's in nature of our world that very often good decisions lead to losses.
  - Scarblac 10y ago
    If they make the same decision for many customers, then you can't just multiply the value of the work to do by that many customers. They still do the same thing, so the value to society as a whole stays the same. That they can multiply their earnings over all their customers, and keep this insane income for themselves, is morally wrong and a huge bug in the way the world currently works.
    - 10y ago
tinkerrr 10y ago
If it was a level playing field then what you said is true, i.e. provide better services in the asset management space. However, the reality is more complicated. Firstly, financial education. How many asset managers like pension funds want to put part of their portfolios in hedge funds even when their returns are sub-par. The industry is very opaque in terms of disclosing returns, and many indices are biased upward due to survivorship bias. Secondly, the lobbying to keep the taxes at a low, and other tax loopholes, onshore and offshore, mean that the profits made by the industry are taxed lower than what would be made by a manufacturing firm. The industry as a whole will never be truly free-market due to many regulations and laws, so your point about having a universal solution for everyone to invest across borders is probably not going to be realized in the next several decades at least.
- mbrock 10y ago
  Not to mention the staggering history of fraud and manipulation for which JPMorgan Chase has paid many billions of dollars in settlements and fines... They got 25 billion dollars from the US government in bailout, then they paid 13 billion dollars as settlement for fraudulent practices pre-2008, and so on and so on... It's total ridiculous ideological stupidity to say "duh, they earn their money on the free market."
  - tinkerrr 10y ago
    True, but remember that JP Morgan doesn't run a hedge fund, and neither do other banks like HSBC that have been caught laundering money for drug cartels and got away with a few basis points of revenue in fines.
    - maxerickson 10y ago
      It runs one of the largest hedge funds. http://www.cnbc.com/2014/05/09/jpmorgan-flagship-hedge-fund-stalls.html http://www.cnbc.com/2014/05/09/jpmorgan-flagship-hedge-fund-...
barrkel 10y ago
We don't measure the correct salary for people by the value they create; if we did, teachers would be much better paid. Instead, we look at supply and demand. How many people could do a similar job?
balance_factor 10y ago
In the case of RenTech's Medallion fund, the capital is provided by the people managing the fund, so the provider and customer are the same person.
InclinedPlane 10y ago
What value? Numbers in balance sheets is not value, per se, and optimizing those numbers is also not necessarily value. Take things down to their bare essentials, what's the economic utility of hedge fund managers? Are they optimizing investment? Are they doing investment at all? Are they helping to ensure liquidity in the market? Are they helping to ensure the markets operate smoothly? Are they extracting rents? Are they merely shifting wealth? It's funny you mention the middle ages, because there are a lot of parallels there, I think. Tax collectors would bring in massive wealth for their employers, but would anyone say that such wealth was fairly and honestly come by? Middle ages governments were rarely consensual and most of their expenditures were not to the benefit of those they ruled. I think if you look at hedge funds you'll see a lot of similarities. A lot of their wealth comes not from investments or from facilitating economic activity. Rather, a lot of it can be characterized as extractive and even exploitative. Hedge funds are not just about managing huge amounts of wealth, painting them as such is a diversion. They are about using money to extract even more money from whatever "market" it is possible to do so, and at whatever cost. Worse yet, hedge funds have so corrupted and influenced our governments that they've been able to socialize their losses during economic crashes, without being forced to socialize their gains during booms. Additionally, some of the largest wealth transfers in history are occurring right now through stock buyback programs, which substantially benefit stock owners and especially hedge funds. Meanwhile, hedge funds are not actually producing substantial returns for their investors, most do worse than index funds. So somehow they manage to be both really bad for democracy, bad for a lot of the things they poke their fingers in (where they look at only the bottom line and attempt to extract the most dollars in the shortest time frame, the worst characterization of the influence of the stock market), and yet they are still bad at providing a decent RoI. But hedge fund managers pay themselves well, certainly. It's little more than the same old problem of oversized corporate executive pay scaled up. Whether they perform well or poorly the refrain is always "oh, but here you are dealing with a different class of people, the CEO class or the hedge-fund-manager class, and they are oh so unusual and special that they demand a higher caliber of pay even when they fail, because you see if you were to get some schlub off the street to do the work they would have cocked it up far worse, so you should be thankful". This despite all evidence imaginable to the contrary. It's simply a matter of elitism and classism run amok, which might as well be a new type of aristocracy. (As for your last comment, this is already done, the only "automated financial tools" most investors need is an index fund, which not only outperforms almost all hedge funds it also outperforms most other types of active investments.)

by kfk 10y ago

danieltillett 10y ago

The same argument is what drug dealers and pimps use.

bertil 10y ago

I think the concern is over what you mean by “providing”: some would say that it seems unlikely they actually create that value as much as they confiscate it. Preventing that was what made kings popular, until we improved on who should control the police.

teekert 10y ago

I think the problem is that they generate so much money without making anything of value. They just shift money around and with that, extract money from the economy, money that represents value generated by someone who made something that other people gladly pay for. I'm probably just to poor at economics but if someone could explain the use and benefit to society of these hedge fund managers, that would be great. If they simply extract value by some complicated process of obfuscation, we should vote for a system where they don't exist.

growse 10y ago
They literally generate value for their investors. A waiter in a restaurant is just shifting money around without 'making anything of value' - should we vote him, and the entire service economy, out of existence as well?
- peonicles 10y ago
  The waiter provides a service in exchange for money. Hedge fund managers literally move money around. Their value add is debatable.
  - growse 10y ago
    They move their investors' money around, thus providing a service to their investors, in exchange for money. I'm not sure I see the difference.
chrisseaton 10y ago
> they generate so much money without making anything of value If they aren't making anything of value then why is anyone paying them? Clearly they are making something of value in someone's eyes. Or by 'making' do you mean literally manufacturing? If so do you not value the work of doctors? They don't produce any goods either. > if someone could explain the use and benefit to society Why does everything have to be objectively useful and beneficial to the whole of society? Why can't we judge things based on the simple question of 'is something willing to pay for it with their own money'. Here they are, so it's clearly useful and beneficial to someone.
- exit 10y ago
  > Why can't we judge things based on the simple question of 'is something willing to pay for it with their own money'. because that's a lie? people pay for certain financial services because their options are systematically oppressed. what we're complaining about in this thread is how the structure of the system artifically captures "value". what would happen if we applied the same simple judgement to heroin dealers? there are clearly many people willing to pay them.
- kisstheblade 10y ago
  But isn't trading a zero sum game? Somebody's wins are another's losses.
- Nrsolis 10y ago
  And yet there are a thousand juvenile games on the Apple App Store making millions.
  - stepanhruda 10y ago
    no one is saying those provide anything of value
- teekert 10y ago
  The fact that someone is willing to pay someone else to find ingenious, opaque methods of scraping value from society without producing anything in return, does not make it ethical.
Nrsolis 10y ago
If you don't think investing billions of dollars skillfully such that you don't lose any of it and earn a risk-adjusted return that's better than your peers is valuable then maybe you should try it sometimes. These guys manage money for hundreds of thousands, if not millions of people who are counting on that money being there for their retirement or families. If a hedge fund manager earns $1 billion, you can be assured that he grew his customers investments by something like $4 billion. For every guy that makes $1 billion, there are a thousand or more that don't get anything close to the salary that a medium-salaried employee at a decent startup gets because they LOST their investors money.
- oarsinsync 10y ago
  > If a hedge fund manager earns $1 billion, you can be assured that he grew his customers investments by something like $4 billion. > For every guy that makes $1 billion, there are a thousand or more that don't get anything close to the salary that a medium-salaried employee at a decent startup gets because they LOST their investors money. Given the 2/20 rules that a lot of funds follow, that's not strictly true. If you're managing a $10bn fund, and working on 2/20 (2% fee, 20% performance), you're taking $200m off the front just for managing the money. Regardless of profit or loss, you've got that money. You're then taking another 20% off of any profits you're making, when you're making them. And then keeping them even if you end up losing money the next quarter, that money's still yours.
  - Nrsolis 10y ago
    That 2% is what you'd get charged by ANYONE with the skill and operations to manage that level of money.
    - oarsinsync 10y ago
      > That 2% is what you'd get charged by ANYONE with the skill and operations to manage that level of money. Also not strictly true. Some of the large funds with (confidence in their ability to perform|managing enough money to not care about massive performance anymore) operate on 1/20 rather than 2/20.

asmithmd1 10y ago

Not close to 10x, according to the article he took as a salary about 1/3 of the returns from all investor capital. The fund returned 14.3% last year and he was paid 6.8%

akie 10y ago

3. Or maybe we can tax them at, say, 90% for every dollar earned over $50 million/year and use the proceedings for the common good?

deleted 10y ago
[deleted]
retube 10y ago
As if any institution would remain in a jurisdiction that levied 90% tax.
- extra88 10y ago
  We're talking about personal income tax, not corporate tax. Other countries have high rates and most of the rich stay, the U.S. used to have rates that high for the wealthiest [0] and they stayed. [0] https://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_top_rates https://en.wikipedia.org/wiki/Income_tax_in_the_United_State...
  - charlesdm 10y ago
    They would take out a few hundred million in earnings before the tax is introduced, so they would never have to take money out again. France introduced a 75% tax in 2012 (or 2013) on income above €1m, and it drove away significant amounts of wealthy residents.
  - whatok 10y ago
    You mean rich people decided to stay in the US during wartime instead of chancing it somewhere else.
    - extra88 10y ago
      Look again, the top bracket was 91% from 1946 until it was lowered to 77% in 1964, after WWII. I'm not declaring what the best top tax bracket should be, I'm countering the dismissal of much higher tax brackets as fantasy with facts that they have existed. Today, many countries in Europe have a top income tax bracket at or above 50% plus a VAT of 20-25%.

deleted 10y ago

[deleted]

Scarblac 10y ago

I don't believe a single hedge fund manager can personally contribute $5 billion per year in value. Some of the people in this list managed funds that lost money, so they obviously didn't.

Mtinie 10y ago
Alternatively, there could be a case to be made that while losing money for their clients they ended using losing less than a competitor would have. Whether this is true or not is highly dependent on a lot of externalities, but I can envision a situations where this would be worth something to a client.
calgoo 10y ago
they lost their customers money, it does not say if their firms lost money... At least thats what I see / hear when these "losses" appear.
bluecalm 10y ago
Maybe they made good decisions and lost money. Let's say I have a million to invest. I value an expert making investment decisions with that million at $10,000 per year. There are many others like me so the manager collects many millions to make decisions with. They doesn't guarantee the money will be made, they just guarantee they will make the best decisions they are able to with that money which has higher expected return than me making those decisions. It's in nature of our world that very often good decisions lead to losses.
- Scarblac 10y ago
  If they make the same decision for many customers, then you can't just multiply the value of the work to do by that many customers. They still do the same thing, so the value to society as a whole stays the same. That they can multiply their earnings over all their customers, and keep this insane income for themselves, is morally wrong and a huge bug in the way the world currently works.
  - 10y ago

tinkerrr 10y ago

If it was a level playing field then what you said is true, i.e. provide better services in the asset management space. However, the reality is more complicated. Firstly, financial education. How many asset managers like pension funds want to put part of their portfolios in hedge funds even when their returns are sub-par. The industry is very opaque in terms of disclosing returns, and many indices are biased upward due to survivorship bias. Secondly, the lobbying to keep the taxes at a low, and other tax loopholes, onshore and offshore, mean that the profits made by the industry are taxed lower than what would be made by a manufacturing firm. The industry as a whole will never be truly free-market due to many regulations and laws, so your point about having a universal solution for everyone to invest across borders is probably not going to be realized in the next several decades at least.

mbrock 10y ago
Not to mention the staggering history of fraud and manipulation for which JPMorgan Chase has paid many billions of dollars in settlements and fines... They got 25 billion dollars from the US government in bailout, then they paid 13 billion dollars as settlement for fraudulent practices pre-2008, and so on and so on... It's total ridiculous ideological stupidity to say "duh, they earn their money on the free market."
- tinkerrr 10y ago
  True, but remember that JP Morgan doesn't run a hedge fund, and neither do other banks like HSBC that have been caught laundering money for drug cartels and got away with a few basis points of revenue in fines.
  - maxerickson 10y ago
    It runs one of the largest hedge funds. http://www.cnbc.com/2014/05/09/jpmorgan-flagship-hedge-fund-stalls.html http://www.cnbc.com/2014/05/09/jpmorgan-flagship-hedge-fund-...

barrkel 10y ago

We don't measure the correct salary for people by the value they create; if we did, teachers would be much better paid. Instead, we look at supply and demand. How many people could do a similar job?

balance_factor 10y ago

In the case of RenTech's Medallion fund, the capital is provided by the people managing the fund, so the provider and customer are the same person.

InclinedPlane 10y ago

What value? Numbers in balance sheets is not value, per se, and optimizing those numbers is also not necessarily value. Take things down to their bare essentials, what's the economic utility of hedge fund managers? Are they optimizing investment? Are they doing investment at all? Are they helping to ensure liquidity in the market? Are they helping to ensure the markets operate smoothly? Are they extracting rents? Are they merely shifting wealth? It's funny you mention the middle ages, because there are a lot of parallels there, I think. Tax collectors would bring in massive wealth for their employers, but would anyone say that such wealth was fairly and honestly come by? Middle ages governments were rarely consensual and most of their expenditures were not to the benefit of those they ruled. I think if you look at hedge funds you'll see a lot of similarities. A lot of their wealth comes not from investments or from facilitating economic activity. Rather, a lot of it can be characterized as extractive and even exploitative. Hedge funds are not just about managing huge amounts of wealth, painting them as such is a diversion. They are about using money to extract even more money from whatever "market" it is possible to do so, and at whatever cost. Worse yet, hedge funds have so corrupted and influenced our governments that they've been able to socialize their losses during economic crashes, without being forced to socialize their gains during booms. Additionally, some of the largest wealth transfers in history are occurring right now through stock buyback programs, which substantially benefit stock owners and especially hedge funds. Meanwhile, hedge funds are not actually producing substantial returns for their investors, most do worse than index funds. So somehow they manage to be both really bad for democracy, bad for a lot of the things they poke their fingers in (where they look at only the bottom line and attempt to extract the most dollars in the shortest time frame, the worst characterization of the influence of the stock market), and yet they are still bad at providing a decent RoI. But hedge fund managers pay themselves well, certainly. It's little more than the same old problem of oversized corporate executive pay scaled up. Whether they perform well or poorly the refrain is always "oh, but here you are dealing with a different class of people, the CEO class or the hedge-fund-manager class, and they are oh so unusual and special that they demand a higher caliber of pay even when they fail, because you see if you were to get some schlub off the street to do the work they would have cocked it up far worse, so you should be thankful". This despite all evidence imaginable to the contrary. It's simply a matter of elitism and classism run amok, which might as well be a new type of aristocracy. (As for your last comment, this is already done, the only "automated financial tools" most investors need is an index fund, which not only outperforms almost all hedge funds it also outperforms most other types of active investments.)