Tuesday, April 24, 2007

Annals of Excessive Compensation

by Tom Bozzo

To crack the ranks of the top 25 hedge fund managers in 2006, you would have needed to take home $240 million. The top dog made $1.7 billion.

Quote of the Day honors go to J-Brad. [*]
“There is some question as to what the hell they are doing that is worth” that kind of money, said J. Bradford DeLong, an economist at the University of California, Berkeley. “The answer is damned mysterious.”
Darn straight.

From the industry side, Jim Dunn of Wilshire Associates is quoted as saying he's happy to pay for 'alpha,' the return independent of the 'market' that hedge fund managers supposedly extract from thin air (justifying their extraordinary compensation).

Well, here's where #3 on the list ($1.3 billion in earnings last year) got his alpha, per the Times:
Mr. Lampert ... has $11 billion of his $14.6 billion ESL fund in the retailer Sears Holdings. Last year, Sears stock rose and with it, Mr. Lampert’s fortune by about $1.3 billion.
Can someone explain to me why that isn't just a canny stock pick? Who's paying hedge fund fees for let's bet the farm on Sears?!

Kudos to Jenny Anderson and Julie Creswell of the NYT for reminding their readers that managers' compensation structure means that they can earn extraordinary compensation in return for middling returns on large funds. We remain mystified as to why massive entry hasn't competed away the obvious excesses of the traditional hedge fund fee structure. Maybe Susan Athey can answer that one.

[*] Should we economists give each other nicknames like that? Uh, maybe not.

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