Apr 24, 2007

Interesting article on hedge fund managers in the NY Times today. Specifically they highlight James Simon who made $1.7B (billion not million) last year. That isn't stock option wealth or sudden wealth from an IPO. That was his salary and bonus.

The article and quite a few blogs seem to be incredulous about this kind of pay. Many are wondering if somehow this is unjust. "Are these people robber barons?" Or they are stating loosely veiled rhetorical questions like "how could these hedge fund managers possibly be adding this much value to the economy?" implying they aren't. These are odd questions from my perspective. You never get this kind of response with a Bill Gates or Page/Sergey who made their billions by building and IPOing companies. No one asks if Google has added billions to the economy.

You basically only get it with hedge funds because they are generally considered to be nefarious entities. But in reality there are very few shenanigans that can be played with a hedge fund. Someone gives you money. You invest it. If you are really good at it like James Simon is you make your clients a crap load of money. In return they are willing to give you a crap load of money. Simple as that. If Simon wasn't worth $1.7B last year then his clients wouldn't have given him that money or they will take it away next year. He doesn't have dumb clients. He has mainly instittional money like pension funds run by boards loaded with smart people.

I always thought the software business was the most attractive business to be in but really asset management is far better. Go look at the margins of asset management companies. Just like software it is highly leveragable. Once you have your fixed costs covered the rest is all upside.

Since Simon runs a 'quant shop' (a fund that uses algorithms to determine what to buy and sell and when to do it) he's super leveraged. He can have a ton of 'assets under management' (billions and billions in this case) and he may only need 20 guys to run the entire company. And since he's good his fees are astronomical.

In addition to that you have no invoicing in asset management. No accounts receivables. You hold your client's money so you simply remove what is owed you. No losses or piracy or customer's credit bouncing.

While I would agree that there are tons of corporate executives out there that get paid way too much based on their performance, James Simon and other hedge fund managers aren't among them. Egregious pay by executives is generally set by themselves or crony boards. Since hedge fund customers pay them directly and can remove their money any time they want, these managers are worth what they earn.

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