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.

 

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