Hedge Funders Have an Achilles Heel, Pray the Public Stays Ignorant About It
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Hedge fund managers don’t have to win all their bets to hit their personal jackpots. They don’t even have to win any. The reason: Investors pay hedge fund managers fees for the privilege of managing their money, usually 2 percent of the total invested. Hedgie superstars can charge more, 3 percent and up.
These superstars do, of course, have to deliver big returns every so often, to justify those fees, and these big returns provide hedge fund managers an even more lucrative income stream. Hedge fund managers routinely rake off 20 percent of whatever investment profits they generate.
The superstars rake even higher shares. Last year, for instance, Moore Capital Management’s Louis Bacon charged investors 3 percent of the money they gave him as a management fee and claimed 25 percent of his investment profits as a “performance fee.” Bacon, for the year, scored a $230 million personal payday.
Bacon's fellow hedgie, Leon Cooperman of Omega Advisors, took home $240 million last year. Cooperman “laughed” last week when a New York Times reporter called to tell him he had made the latest hedge fund manager top 25.
“I have no idea how much I made last year,” Cooperman explained to the reporter. “I don’t know until it’s tax time.”
And tax time just happens to be when hedge fund managers really clean up. Corporate CEOs face a 35 percent tax rate on all compensation over $373,650 they took home in 2010. Hedge fund honchos, thanks to the infamous “carried interest” tax loophole, only pay a 15 percent tax on the hundreds of millions they pull in from their “performance fees.”
Concerned lawmakers have been trying — and failing — to close the “carried interest” loophole for the past half-dozen years. This fantastically lucrative free-pass for hedgies will this year cost the federal treasury upwards of $4 billion — from just the top 25 hedge fund managers alone.
Even so, this week on Capitol Hill, frenzied budget negotiators won’t be debating “carried interest” as they struggle to avoid a federal government shutdown. Lawmakers just won’t have the time. Negotiating away the jobs of Head Start teachers, after all, can really chew up the hours fast.
Sam Pizzigati is the editor of the online weekly Too Much, and an associate fellow at the Institute for Policy Studies.