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- Richard
Hedge Fund Consulting Blog
Hedge Fund Group (HFG)

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…

“Be happy with what you got and shut up”.

Is that about right ? Something tells me that you wouldn’t be so cavalier about this if it were *your* retirement money that you were counting on.

The fact of the matter is that the traditional investments would be doing a lot better if we’d stop all of this financial speculation and get back to being an actual productive economy. There’s way too much money chasing way too little actual productive value, and way too many people taking their pound of flesh in the process.

All this belly-aching about compensation comes down to jealously. Just like all the dis-belief about the internet million/billionaires in the late 1990′s and the Schadenfreude that came with the collapse. If you think you can put up the performance these guys do, all you have to do is convince some initial investors and have at it.

I had some further responses for kennycan, but the spam filter keeps flagging my comments as spam, and I’m done trying to guess which phrase or phrases it doesn’t like.

Here is my current favorite historical example: milk. When you make the production of milk efficient, quality goes through the floor. Something like 99.9% of us don’t know what milk tasted like before 1850. But 0.01% of us do know, because a few farmers are making milk the same way it was made back then–and it tastes gooooood. In those days there was something known as the “milk cure”–drink nothing but milk for a month and it would cure just about any disease. Today nobody would try to argue that milk is a health food, because it isn’t anymore: there is plenty of science to show that modern milk causes heart disease, cancer, allergies, etc.

A basic aspect of the problem is that the vast majority of consumers are not aware of milk quality issues, so the apparently “rational” choice (paying less for the “same” product) is ultimately not the real rational choice (paying more now to avoid heart disease and cancer later). This deviation from rational behavior has only increased over the past 150 years due to the steadily growing political influence of big dairies, and there is little hope of mean-reversion in the foreseeable future.

Now investors would surely have been rewarded for reallocating assets away from slow, small-scale milk production towards large factory dairies. So in terms of liquid money, there is greater value in efficient milk production. But throw the health and quality issues into the equation, and this added value disappears. What is left is a transfer of wealth from small dairies and consumers to large dairies and their investors. In particular, the consumer experiences a loss of wealth in the form of a loss of health and quality of life.

The people you should be criticizing is not Party B but Party A. “Why is Party A not taking his US$100mm and investing it in something that creates value”, might be a valid argument. If it’s “Heads I Win, Tails you Lose” then the answer is Party A is stupid. But that would be off topic to the post at hand.

Solutions like capping these people’s salaries is counterproductive. It rewards Party A but doesn’t necessarily benefit anyone else. If Party A no longer has acess to the investment returns of a Jim Simons et al, then in the long run it hurts Party A as well. So how has any of this made anything better?

It’s the problem with socialism. We end up trying to equalize the outcomes by cutting everyone down to the lowest common denominator rather than expanding equality of opportunity for everyone.

I’ve got an idea. If it’s so easy, why don’t we all get together and start our own hedge fund. The Big Picture Blog Readers Hedge Fund. We only charge 1 + 10 and we voluntarily pay 35% tax rates, just to be fair to the regular guy, doncha know.

At what store can I buy this something?

Didn’t think so.

Posted by: donna | Apr 17, 2008 12:58:06 AM

I have a friend who is a tailor. He’s probably the best tailor in the world. He’s so good that the most successful gentleman in the world will pay large sums of money to get his bespoke suits. Because of this he only works by appointment and charges oodles of money.

Substitute “hedge fund manager” for tailor and substitute “investment returns” for bespoke suits.

Jeebus, you people make it sound like you’re paying these guys.

I also believe it’s unfair that ordinary people have to pay 30+% income taxes while these people only pay 15%. That’s why I think we should lower ordinary income rates down to 15%.