Monday, April 15, 2013

Hedge-Fund Managers Do Mediocre Job, Make Billions Anyway

According to New York’s Kevin Roose If you're a hedge-fund manager, you have one job: to beat the market, using your special-investing juju to generate what's called "alpha" for your investors by out-performing the S&P 500 or another basic benchmark. That's it. That's all you have to do.
The twisted genius of the hedge-fund business model, though, is that if you have enough money under management, you can literally be too big to fail, even if you don't beat the market.

I was reminded of this today while looking over Institutional Investor's "rich list," its annual compilation of the outrageous amounts of money earned by top hedge-fund managers. In 2012, according to the list, the top earners in Hedgistan were: David Tepper (brass-balls guy): $2.2 billion,Ray Dalio (intense-manifesto guy): $1.7 billion,  Steve Cohen (insider-trading-investigation and art-buying guy): $1.4 billion…But Dalio and Cohen, who also made the top three with Tepper, didn't even out-perform the market. Dalio's hedge fund, Bridgewater Associates, made only 0.8 percent in its flagship Pure Alpha fund. Cohen's firm, SAC Capital, made just 13 percent on the year, when it wasn't being chased around by the Feds.

But the beauty of being the manager of a huge hedge fund, in part, is that you get paid no matter what. Both Dalio and Cohen fattened their own fortunes thanks to the fee structures of their funds, which give them a right to a certain fraction (usually 2 or 3 percent) of their assets under management, even if those assets don't make money in a given year. In other words, if you have $83 billion in hedge fund assets under management, like Dalio does, you get about $1.7 billion just for turning on the lights….

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