Capitalism gone wild: Hedge fund bosses no better than average investors, but paid $1 billion a year

Ken Griffin, manager of the Citadel hedge
 fund, was paid $1.3 billion last year.

We are told that the rich are rich because they are so successful, whether they are brilliant executives or trust fund kids to the extreme such as the Walton (Walmart) family.

But a pattern emerged more than a decade ago in which failed executives nonetheless received huge pay hikes, bonuses or golden parachutes. In recent years, no one has relished this anti-merit system of 21st Century capitalism more than the nation’s notorious hedge fund managers.

In 2014, the top 25 hedge fund bosses reaped $11.6 billion in compensation in 2014, according to an annual ranking published last week Institutional Investor’s Alpha magazine. Some individually eclipsed the $1 billion mark.

That collective payday came even as hedge funds, once high-octane money makers, realized on average investment returns in the low-single digits. In comparison, the benchmark Standard & Poor’s 500-stock index posted a gain of 13.68 percent last year when reinvested dividends were included.
To put it in simpler terms, an amateur investor with a routine portfolio of stocks and bonds did better with his investments than the guys making $1 billion a year.

It gets worse. Last year’s mediocre performance by the hedge funds was not an aberration. During six years of a bull market on Wall Street these hot-shot investors have failed to keep up year after year.

According to the New York Times, most amazing of all is that, under this rigged system, the pay for top earners was down by hundreds of millions of dollars in 2014. These managers made just over half of the $21.15 billion earned by the top 25 in 2013.
Overall, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average, according to a composite index of 2,200 portfolios collected by HFR, a firm that tracks the industry. Hedge funds, it should be explained, are lightly regulated private pools of capital open to institutional investors like pension funds, university endowments and wealthy investors.

For the average person, those nine- and 10-figure salaries are beyond comprehension. Some pundits have tried to explain just how big those paychecks are.

One critic of this outrageous too-big-to-fail system calculated that 1 hour of pay for a manager making $1 billion annually equals 21 years of earnings for an average worker.
Another comparison found that those top 25 hedge fund bosses make more money in one year than all the kindergarten teachers in America – combined.

For the uninitiated, one commentator explains hedge funds this way: “They are creations by overly ambitious and egotistical financial players (or even computer gurus with a knack for algorithms) who attract hundreds of billions of dollars in investment money on the promise that they know the market better than anyone else.

“They typically buy up struggling companies, slash their workforce and employees’ pay and benefits and then resell those companies on the basis of a lower bottom line that completely ignores quality production.”

In other words, these fund managers are not job creators. They are job destroyers.

What’s more, they get paid huge amounts of money whether they succeed or fail or just muddle along.  They charge an annual management fee equal to 2 percent of the assets a customer invests. They receive 20 percent of all profits gained. And they benefit greatly from a gaping loophole in the federal tax code that allows them to pay a special tax rate of just 15 percent.

For decades, hedge funds have operated in a rather complex, opaque manner. Their investor-customers were not privy to the details of what the managers were doing with their money. Regulatory changes imposed by the Dodd-Frank financial overhaul have made the hedge fund sector more transparent. But the managers don’t like it. They say the bureaucratic red tape created by Dodd-Frank keeps their firms from concentrating entirely on achieving a high rate of return.

Yes, apparently they say those kinds of things with a straight face.

In response, disgruntled investors are making noise and, in some cases, walking away.

Tens of billions of dollars have flowed out of hedge funds as the second-rate track record continues. The California Public Employees’ Retirement System, the largest pension fund in the nation, announced last September that it’s withdrawing all of its $4 billion of hedge fund investments.
If that trend continues, under our current version of a competitive, free-market system, we could see poorly performing hedge fund managers paid just $100 million --- $48,000 per hour – in the not too distant future.

If so, that would be the 21st Century version of economic progress.

In the meantime, we have Capitalism Gone Wild.