Hedge fund managers just want to be loved. So they’d be willing to forgo the paychecks, right?

Hedge fund manager Bill Ackman’s wildly over-the-top response to Joe Nocera’s critical column in last Saturday’s NYT (Felix has an excellent summary of the back and forth) got me thinking about the strange workings of the minds of the lavishly compensated. Ackman’s tone reminded me a lot of the air of aggrievement that pervades his friend and fellow hedge fund manager David Einhorn’s Fooling Some of the People All of the Time (which could be a truly great book if it weren’t so danged whiny). It also reminded me at least a little of the screed that my friend Cliff Asness (another big-time hedgie) wrote a few weeks back about President Obama’s attack on the hedge funds that owned Chrysler bonds and weren’t willing to go along with his rescue plan. (Cliff’s tone was more combative than whiny, and his essay displayed an actual sense of humor, so it’s not entirely fair to lump him in with Ackman and Einhorn. But I needed a third example to make my case, and Cliff more or less fits as he too was taking exaggerated umbrage with criticism.)

So here’s what I’m getting at (and I promise, no more parentheticals for the rest of this post): Hedge fund managers make tons and tons of money. That big money is supposed to incent them to dig into companies’ books and question management’s intentions and devise cool computer-driven investing strategies and stand up to President Obama and whatever the heck else they deem useful in the service of higher returns for their investors. Yet the money doesn’t seem to be doing it for them. These guys really want to be praised and honored for the good they do in the course of making all that money.

This just seems messed up. They get all that money! Shouldn’t they leave the praise and honor to those who are doing praiseworthy and honorable things and not making millions a year for it? Or maybe what Ackman and Einhorn and Asness are telling us is that it isn’t about the money. Those 2 and 20 hedge fund performance contracts (and the incentive-laden compensation plans at investment banks) are a total waste. All these guys want is a little pat on the back now then. Or maybe a cookie.

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

epicureandealmaker

Cookies for Hedgies! What an excellent idea. I will propose it at the next annual benefit for the Robin Hood Foundation.

Even the most filthy rich financial parasite just wants to be loved and admired, and their current inamorata in the mainstream media seem to be falling out of love. [Sad trombone]
http://www.simonvinkenoog.nl/beeld/Yogi%20-%20Annelies%20Rigter.jpg yogi

They can pay me a portion of their profits and I’ll praise them all they want. Nobody may listen to me, but I swear the jobs Ackman, Einhorn and Asness are doing is amazing. See, its that easy, now where’s my check?
ohiopapa

All the HF managers now (in gruff voices), “C is for Cookie, its good enough for me, oh, Cookie, Cookie (and Capitalist) starts with C!”
harryfox

What Ackman and Einhorn and Asness are telling us is that they have a colossal sense of entitlement. To both money and praise.
tc125231

harryfox has got it. Amen preacher. There is very little evidence that the financial system serves the needs of the nation better than it did before Hedge Funds or Private Equity. All it does is make a lot of money for people I have no reason to like or admire.

“So what?.” you may well ask. “It’s not illegal.”

“Well and good,” I say. “We won’t lynch them. But I still have no reason to like or admire these people.”
tc125231

Now some of you might think that folks are being too harsh on the financial community, but before making that determination, I ask you to sit yourself down outside the cardboard box many people are currently living in and perform a couple thought experiments (you know, like those physicist guys are always doing).

What is the primary purpose of finance? That’s right –to allocate capital in the most economically efficient fashion! Now leaving aside the endless bubbles and crashes we have been experiencing, I ask you, how would we know that they had performed this function so well that the more than doubling of their share of all corporate profits in the last 30 years was justified?

Of course! If they had earned their money, the non-finacial of the economy would have been doing far better than its historical average!
Is there any evidence of this? If there is, the case has not been made. To the contrary –to the average American, the 1950s and 1960s looks like an economic Golden Age, with afforable homes, health care, and higher education –not to mention plentiful, adequately paying jobs. In 1971, for example, a nice home cost less than $30K in the Chicago suburbs, the Bell System had a life-long total health care deductible of $50, and you could send your child to a private school for $200 anuually. The home was about 75% of the annual salary of a government scientist –now it would be 200% or more. The health care deductible is –in most cases –over a thousand per year, AFTER the employee has paid $5,000 or more of the corporation’s health insurance costs. A private college is $30,000 to $40,000 per year — or more like 25% to 40% of a government scientist’s salary.

Now, for our second thought experiment. Why do you think otherwise sophisticated people were so easily duped by Bernie Madoff (besides that always required element of a goood confidence scheme –the sucker’s desire to get something for nothing)? Could it be ebcause even financially sophisticated people don’t think hedge funds are picking and backing superior undervalued companies? In other words –most people think hedge funds are cheating! They are not creating value –they are gaming the system.

My son and a friend of his recently won a Fantasy Baseball League championship with very little baseball knowledge. How did they do that? They used statistical anomalies in the game rules to “game” the system.

There is a general belief that both hedge funds and private equity partnerships have been “gaming” the system. If you believe this is the case, you would believe a “top” player could create improbable returns –and you would not be surpised that he wanted to keep it all secret.

So, in this context, someone might admire hedge fund managers for roughly the same reasons people might have admired Robert Vesco when it appeared he got away with it.

That is, because they appear to have successfully scammed a bunch of other people’s money without having done anything actually useful.
tc125231

Correction. In 1971 you could send your child to a private school for about $2000 annually.
strawmn

tc,

I agree with your conclusion, but not necessarily your argument. I agree that the financial sector has failed to allocate capital in such a way the returns have been felt pretty evenly throughout society. Even if they’ve had small successes, it doesn’t justify the massive increase in their compensation.

But Wall Street isn’t at fault for the lack of ‘plentiful, adequately paying jobs.” That has more to do with easy global movement of capital, competition from the third world, and (more generally) the fact that most industrial economies seem to develop their way past industrial competativeness. See the northeast of England for a great example of that.

In different ways, education and health care are two other false parallels. They’re failures, but they’re social and government failures, not the fault of Wall Street.

That said, I completely agree that hedge funds, or Wall Street in general, have done anything to justify their current size to the world in general. And hedge funds specifically have failed in their original purpose, which was to hedge against, not magnify, the risk of financial collapse.