« Investing and the Environment | Main | Cyclicality in VC Returns -- and in VCs »
Latest Stories
- Excel Wankers and Recession Averages
- Sorry, New York is Closed. Check Back Later.
- Catching Falling 2009 Earnings Estimate Knife
- Survivorship Bias in Global Markets
- Talking Positions on a Lazy-ish Retirement Portfolio
March 5, 2007
Putting Hedge Fund Income in Context
I've been looking at the latest data on the top hedge funds in the U.S., which shows the dominance of Goldman, Morgan Stanley, D.E. Shaw, et al. These firms all manage more than $20-billion, and the top ten together account for more than one-third of all U.S. hedge fund assets.
What does all that really mean though? I mean, sure, fourth-place D.E. Shaw has $26.3-billion under management, but you have to put that in practical terms or it just sounds like a Really Big Number.
So, how about this: Assuming an alpha of 10% and an average fee of 1% across all assets, then that works out to D.E. Shaw partners grossing $789-million a year. Still too abstract? That's about $3.6m a working day, or or $41.51 a second. In other words, during the time that the average male urinates (about 20 seconds) D.E. Shaw makes $830 -- less expenses, of course.
Sphere It
| 
Digg it
| 
Bookmark it
| 
Stumble it
| 
Facebook it
Yes, I was being conservative :-)
Sometimes I like to think about it this way:
- Pick a guy from the Gilded Age. Let's take Cornelius Vanderbilt this time: his name basically means "tons of money" in English. The Vanderbilt houses, etc.
- Vanderbilt's net worth at the time of his death (1877) was estimated to be around $100m. That's what the Commodore managed to pile up over his whole (rapacious, robber-baron's) life.
- $100m 1877 dollars is about $2b 2007 dollars.
- That's on the order of Jim Simons '06 comp. COMP! The Eddie Lamperts and Jim Simonses of the world are knocking down a Vanderbilt fortune *per year*!
Its an asset gathering business. If investors are not smart enought to realize it then they deserve to be taken advantage of.
Technology + globalization = increased opportunity on the whole, which results in a bigger pipeline for those best positioned to exploit it.
Think of the total opportunity sum as a bell curve. As the area under the bell curve increases via wealth creation (technology + globalization), the fat tail on the right side of the distribution gets longer and longer as it asymptotes above zero.
With all the possibilities ahead, it's not unreasonable to think the 21st century version of Bill Gates could be a trillionaire.
While increasing disparity between the best and the rest may be displeasing to some, the good news is that technology and globalization also help cut off the left side of the distribution. At some point in the next 50 years, everybody should have clean water for example.
This post isn't meant to worship the new finance barons btw. To a large degree they are simply exploiting the flaws of a ridiculously lopsided system. One day we'll look back and see the Federal Reserve for what it is: a hallmark of the financial dark ages.
Funny you should say that Franklin. Just finished reading the final galley of my friend Nassim Nicholas "Fooled by Randomness" Taleb's new books, and he walks you to the same conclusion about wealth edge-cases.
I have limited understanding of the dynamics of the hedge fund industry, but what I have trouble understanding is why fund fees haven't decreased. Performance fees of 20% alpha seems pretty generous now that there are so many hedge funds out there. I would have thought that as the number of funds has exploded, funds will have been forced to compete for investor money.
Do you think that hurdle rates will reappear in the future? Moreover, I find arguments that many hedge funds employ strategies that are not pure-alpha and should use more appropriate betas to measure alpha to be quite justified.
I'd love to hear your thoughts on this.
Only thing you forgot, DE Shaw charges 3% of assets and 30% of profits!