Lavish Hedge Fund Paydays – Just Not for the Investors
Profits are good. You love profits, I love profits. But with some regularity a few titans of the financial world take home mind-boggling profits, and you have to wonder, why? Did they really deserve it?
An article in The New York Times of 4/15/13, documented how a handful of hedge fund managers made massive amounts for themselves, yet in some cases produced only mediocre results for their clients.
A few examples: Steven A. Cohen, a name you might know because of all the investigations surrounding his firm, SAC Capital Advisors, made $1.4 billion in 2012, despite the fact that the investments of the hedge fund “fell just short of the market’s returns” for the year.
Similarly, Ray Dalio, whose Bridgewater Associates also lagged the market indexes, consoled himself with $1.7 billion in take-home pay. All told, the top 25 hedge fund managers earned an aggregate $14.14 Billion last year. That averages out to $565.6 million for each of the top 25.
As always, some hedge funds did well for their investors, some did not. But what is troubling, as The Times reports, is that, “For the fourth consecutive year, most hedge funds failed to beat the market.” That lackluster performance has a special sting for hedge fund investors, since typically those funds charge a base fee of one or two percent, plus a performance fee of ten to twenty percent of the profits – if there are profits. And astonishingly, SAC Capital “charges investors a 50 percent performance fee.”
Why do so many sophisticated investors put up with that? Are they aware that some high-flying hedge funds, helmed by financial luminaries, crashed and burned in past years? By their very nature, hedge funds tend to take outsized risks when seeking outsized returns. Sometimes the investors strike gold, but too often, to my mind, hedge fund investors are seeking the thrill of the casino, instead of investing patiently and wisely.
Various articles present different answers to the questions of why rich investors flock to hedge funds. I’ll just say that in my opinion, sticking to low-cost, no-load Fidelity mutual funds (or funds from other low-cost providers) seems far more sensible than paying exorbitant fees to super-wealthy managers.