Down But Not Out at $464 Million a Year

By Sam Pizzigati, Too Much: A Commentary on Excess and Inequality. Posted April 4, 2009.

Not everyone in the international hedge fund industry is making millions. Not everyone in the hedge fund industry right now even has a job. Amid the worst global economic meltdown since the Great Depression, hedge funds are hemorrhaging positions. An estimated 20,000 will be gone by year's end.

But the hedge fund industry still does have something no other industry in the known universe can match: the best-paid top executives who ever lived.

"These are the highest earners," as Manhattan College financial historian Charles Geisst put it last week, "of all time."

That observation came right after Alpha, the hedge fund industry trade journal, reported that the hedge fund industry's top 25 managers added $11.6 billion to their personal fortunes in 2008, an average of $464 million each, the third-highest top 25 total since Alpha started keeping score in 2002.

How did the movers and shakers of hedge fund land work such magic? For the most part, we simply don't know. Hedge funds, as largely unregulated entities, don't have to reveal almost anything about how they go about their business.

The most secretive hedge fund manager of them all, James Simons of Renaissance Technologies, netted $2.5 billion last year. One of the funds Simons manages generated a 160 percent return in 2008, through some financial alchemy that observers, in the absence of any real information, have taken to describing as "computer-driven trading strategies."  

The number two on this year's hedge fund top 25 we know more about. John Paulson of Paulson & Co. has made his big money -- $2 billion in just 2008 alone -- by betting that the incredibly overinflated market for subprime mortgage-backed securities would tank.

Paulson no doubt understands the lucrative irony behind his enormous personal windfall. His colleagues in the hedge fund industry helped inflate the market for subprime securities in the first place.

Fifty years ago, in a more equal America, hedge funds as we now know them didn't exist. They didn't explode onto the financial scene until the 1980s, when the Reagan revolution was rapidly concentrating income and wealth at the top of the U.S. economic ladder.

America's newly flush rich, their pockets bulging, had plenty of cash to invest, and the emerging new hedge funds -- pools of investment capital open only to deep-pocket investors -- promised better returns than those deep pockets could get anywhere else.

Hedge fund managers, needing to deliver on those promises, hungered mightily for high-return investment opportunities that could keep their wealthy clients happy. Traditional Wall Street investments -- corporate stocks and bonds -- couldn't deliver the high returns the hedge funds needed. But the financial world's new-fangled "derivatives" could.  

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Sam Pizzigati is the editor of the online weekly Too Much, and an associate fellow at the Institute for Policy Studies.

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