Hedge Fund Managers Turning the Woes of the World into Billion-Dollar Paydays

By Sam Pizzigati, Too Much: A Commentary on Excess and Inequality. Posted April 24, 2008.

Sixteen tons, singers once crooned, and what do you get? Well, if you hauled 16 tons for 16,000 thousand years -- at an annual pay rate of $36,140, the typical 2007 U.S. worker take-home -- you'd get almost as much as our financial world's 50 highest-paid hedge fund managers averaged last year, for just 12 months of hedge fund “labor.”

In 2007, the business trade journal Alpha reported last week, the hedge fund top 50 collected $29 billion -- an average of $581 million each. The king of them all, John Paulson of Paulson & Co., last year took home $3.7 billion from his hedge fund labors.

Alpha has been tracking hedge fund earnings for just seven years. In the first Alpha ranking, released back in 2002, hedge fund managers needed to clear a mere $30 million to make their way into the top 25. That entry threshold shot up to $210 million in the rankings Alpha published a year ago.

In the new Alpha rankings, gaining top 25 status demanded at least $360 million.

The Alpha magazine figures, incredibly, actually understate how much loot is cascading into hedge fund kingpin pockets. Alpha only tallies income that reflects the “investment prowess” that hedge fund managers display.

That is, Alpha just counts the annual fees that hedge fund superstars charge clients for managing their money -- that’s usually 2 percent of the money invested -- and the 20 share of the profits that hedge fund managers skim off from any gains they make selling off assets. Their typical share of these investment gains runs 20 percent.

But Alpha doesn’t count any money that hedge fund managers may make selling off shares of stock in their firms.

Daniel Och, for instance, rates just 41st on Alpha’s new top 50 list, with “investment prowess” income at only $245 million. Och, in hard fact, did quite a bit better financially than that in 2007. Last November his firm went public on Wall Street, a transaction that added $4.5 billion to his personal bottom line.

Just what do hedge fund managers do to “earn” these awesome sums? They make most of their killings betting on others’ misfortune. John Paulson, the $3.7 billion-dollar man, racked up his big gains wagering that reality would collapse the subprime mortgage market. Other hedge honchos placed winning bets on rising commodity prices for oil, wheat, and copper.

The hedge fund gravy train doesn't figure to be stopping any time soon. HedgeFund Intelligence, another trade publisher, calculates that hedge funds globally held $2.65 trillion in assets at the start of 2008, a sum up 27 percent over the year before.

In 2 percent management fees alone, that stash of cash will generate $53 billion in 2008 for John Paulson and his fellow hedge fund managers.

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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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