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Last year, 25 hedge fund managers earned a combined $22 billion

14 points by ecounysis 16y ago

ecounysis 16y ago
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.
- hugh3 16y ago
  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 16y ago
    Sorry. Thanks for the feedback.
karzeem 16y ago
> 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.
- thrill 16y ago
  Their justification is that participation is entirely voluntary and their track record makes those participating want to be there.
- hugh3 16y ago
  I'm tempted to say "Hey, if you don't like it then don't invest your money with D. E. Shaw". On the other hand, how much of the money that goes into D. E. Shaw is invested by folks who aren't actually investing their own money? (eg managers of pension funds, et cetera).
- cynicalkane 16y ago
  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.
  - karzeem 16y ago
    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.
- nolite 16y ago
  profits from hedge funds aren't actually infinitely scaleable.. By taking on new investments, they increase their risk of strategies giving them less returns
jtbigwoo 16y ago
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?
- hugh3 16y ago
  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.
  - nickbp 16y ago
    Yet they still manage to under-perform year after year.
    - PatrickTulskie 16y ago
      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.
      - phamilton 16y ago
        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.
    - hugh3 16y ago
      Where's the evidence for this one? I went googling for "hedge funds underperform" and found an article about how major hedge funds had indeed underperformed the S&P 500 over 2010, but outperformed it over the three-year-period 2008-2010. That is, of course, how hedge funds ought to work -- smoothing out the dips (2008) at the cost of being slightly conservative in the booms.
makecheck 16y ago
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?
- jacques_chester 16y ago
  In the interests of being contrary: Suppose you find that the hedge managers are only 0.1% better than the grads. Is it still a good idea to pick the hedge manager? When you're talking about billions dollars -- it might be.
- orijing 16y ago
  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...
prodigal_erik 16y ago
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?
- nickbp 16y ago
  These days it's just a label which allows them to largely avoid the SEC.
ecounysis 16y ago
It is hard for me to imagine a scenario where they (on average) each created $880 million in value to society.

14 points by ecounysis 16y ago

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.

hugh3 16y ago
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 16y ago
  Sorry. Thanks for the feedback.

karzeem 16y ago

> 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.

thrill 16y ago
Their justification is that participation is entirely voluntary and their track record makes those participating want to be there.
hugh3 16y ago
I'm tempted to say "Hey, if you don't like it then don't invest your money with D. E. Shaw". On the other hand, how much of the money that goes into D. E. Shaw is invested by folks who aren't actually investing their own money? (eg managers of pension funds, et cetera).
cynicalkane 16y ago
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.
- karzeem 16y ago
  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.
nolite 16y ago
profits from hedge funds aren't actually infinitely scaleable.. By taking on new investments, they increase their risk of strategies giving them less returns

jtbigwoo 16y ago

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?

hugh3 16y ago
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.
- nickbp 16y ago
  Yet they still manage to under-perform year after year.
  - PatrickTulskie 16y ago
    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.
    - phamilton 16y ago
      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.
  - hugh3 16y ago
    Where's the evidence for this one? I went googling for "hedge funds underperform" and found an article about how major hedge funds had indeed underperformed the S&P 500 over 2010, but outperformed it over the three-year-period 2008-2010. That is, of course, how hedge funds ought to work -- smoothing out the dips (2008) at the cost of being slightly conservative in the booms.

makecheck 16y ago

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?

jacques_chester 16y ago
In the interests of being contrary: Suppose you find that the hedge managers are only 0.1% better than the grads. Is it still a good idea to pick the hedge manager? When you're talking about billions dollars -- it might be.
orijing 16y ago
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...

prodigal_erik 16y ago

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?

nickbp 16y ago
These days it's just a label which allows them to largely avoid the SEC.

ecounysis 16y ago

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