Hedge Fund Manager “Earns” $1 Million an Hour
Last year, even as 15 million Americans continued to look for work and the average wage barely kept up with the cost of living, the 25 best paid hedge fund managers raked in a total of $14.14 billion, an average of $565.6 million per year, according to an analysis published last week by Institutional Investor Alpha. The top ten took home $10.1 billion, and top manager David Tepper—who did not even make the top 25 last year—made off with $2.2 billion, equivalent to $1,057,692 an hour, as much as the average American family makes in 21 years.
As the report points out, the 2012 numbers were actually the lowest since 2008, when hedge fund managers lost money because of the financial crisis they largely caused. In 2011, the top 25 made $14.4 billion.
One crucial but unasked question is whether these Wall Street money men—or anyone for that matter—can actually “earn” such extravagant sums as $1 million an hour. The easy answer of orthodox economics—that the market is the arbiter of worth—was fatally undermined years ago during the “Cambridge Capital Controversy,” in which it was proven that market worth must rest on a theory of value which locates the source of value outside the market. In other words, value is a real phenomenon, not just an artifact of the market.
Defenders of the Wall Street status quo typically answer that investment activities add value to the real economy by efficiently steering investment toward firms likely to make a profit and away from those likely to fail. While that is true enough for the average stockbroker, it is simply beside the point when it comes to hedge funds.
Although hedge funds started out in the 1950s as investment vehicles with deliberately mixed portfolios intended to “hedge” or mitigate risk, today the term is used to describe at least 25 different investment strategies. In fact, hedge funds are largely unregulated investment vehicles offered only to the super rich that pay their managers a percentage of the profits generated.
The trouble is, hedge funds do not make their money in ways that add value to the real economy, instead they employ techniques that exploit market flaws to create profits for a very few investors. How do they make their money? Let us count some of the ways, as articulated by Les Leopold at AlterNet:
1. Insider Trading
One strategy is to use one's connections to make money from inside information before it is publicly available. U.S. Attorney for the Southern District of New York Preet Bharara has convicted about 70 hedge fund managers for engaging in insider trading since 2009, and believes this may be only the tip of the iceberg: “Given the scope of the allegations to date, we are not talking simply about the occasional corrupt individual. We are talking about something verging on a corrupt business model.”
2. Defraud Investors
It is a known fact that, in the years before the 2008 Crash, hedge funds colluded with big banks to create mortgage-related securities that were meant to fail so hedge fund investors could make money by betting against them. Although Goldman Sachs, JPMorgan Chase and Citigroup have paid more than $1 billion in fines to the SEC for these frauds, their hedge fund co-conspirators made billions with impunity.
3. Media Manipulation
Spreading false information designed to assist your betting strategies is another common tactic used at hedge funds. Jim Cramer, host of the CNBC show “Mad Money,” and a successful hedge fund manager in the 1990s, admitted that he fed false rumors to reporters so his hedge fund could make money on them, warning that “if you’re not doing it, maybe you shouldn’t be in the game.”
4. Ultra High-Speed Line Jumping
Given the billions at their disposal, hedge funds can afford ultra-high-speed computers able to get an exchange feed a few nanoseconds before anyone else. They then use that information to electronically jump in line ahead of normal investors, buy stocks (or other investment vehicles) that others want, raise the price a little and then sell them back to the normal buyers. Doing this millions of times a minute, the funds rack up billions in profit every year.
To Learn More:
America's New Math: 1 Wall Street Hour = 21 Years of Hard Work For the Rest of Us (by Les Leopold, AlterNet)
The Rich List (by Stephen Taub, Institutional Investor Alpha)
Taxing the Top 25 Hedge Fund Managers Like Average Citizens Would Cut Deficit by $44 Billion (by Noel Brinkerhoff, AllGov)
25 Hedge Fund Managers Make as Much Money as 1,150,000 Average Americans (by David Wallechinsky and Noel Brinkerhoff, AllGov)
The Economy is Great…If You’re a Hedge Fund Manager (by Noel Brinkerhoff, AllGov)
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