Down But Not Out at $464 Million a Year

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

These increasingly exotic financial instruments, all based on the endless repackaging of ever-shakier mortgage loans and consumer debt, would find an eager hedge fund market. Hedge fund dollars, in effect, kept the U.S. economy blowing bubbles.

The bubbles all burst in 2008, and the hedge fund industry has certainly felt the aftershock. Over 900 hedge funds, about 14 percent of the fund total worldwide, shut their doors last year. The industry ended 2008 with assets down 37 percent, over $700 billion, from the industry peak last June.

But that downturn left an estimated $1.2 trillion still sloshing in hedge fund coffers, more than enough to power top hedge fund execs to another round of windfalls.

These top execs typically charge investors a fixed percentage of the billions in assets they manage, usually 2 percent. The celebrity hedge fund managers charge even more. James Simons, for instance, levies a 5 percent management fee on the billions investors turn over to him — and then takes a 44 percent cut on any profits he makes selling the assets he buys with those investor billions.

In 2008, you didn't have to be a hedge fund celebrity like Simons to score big. Even junior hedge fund analysts did quite wonderfully, given the economic tenor of our times. They averaged $195,520 last year, says the trade journal Alpha.

Industrywide, hedge fund jobs paid an average $794,000 in 2008, down from $940,000 the year before. U.S. Treasury Secretary Tim Geithner last week unveiled a plan that will hand hedge funds and other big investors a subsidy worth as much as $1 trillion to start buying up the toxic derivative securities that now have no little or market value.

If Geithner's plan works, hedge funds will take those tax dollars and jumpstart the market for toxic securities, the securities will rise handsomely in value, and hedge fund managers will reap still more jackpots.

But some financial insiders like venture capitalist and commentator Peter Cohan don't believe Geithner's plan will work. A good many hedge fund managers won't play ball with Geithner's new plan, Cohan predicts, "because they fear that there'll be a public outcry over their compensation if the plan makes them even richer."

And if that outcry gets loud enough, the hedgies no doubt worry, lawmakers may feel compelled to shut the loophole that lets hedge fund managers claim much of their income as capital gains. That neat trick lowers the tax rate on a hefty chunk of hedge fund manager earnings from 35 to 15 percent.

The cost to taxpayers? The hedge fund loophole, the Institute for Policy Studies in Washington, D.C. estimates, is running taxpayers about $2.7 billion a year.

See more stories tagged with: economy, money, wall street, hedge fund, financial crisis, investments

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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