Tuesday, May 10, 2016

Payouts Fit For Hedge Fund Kings?

Svea Herbst-Bayliss of Reuters reports, Best-paid U.S. hedge fund managers take home $13 billion:
Hedge funds lost money for their investors last year but the industry's top-paid managers had a banner year, with five men earning more than $1 billion each in 2015, an industry survey released on Tuesday showed.

Together, the 25 best-paid hedge fund managers took home $13 billion, 10 percent more than the previous year. For many, computer models played a critical role in their success, according to Institutional Investor's Alpha's 15th annual ranking of the industry's highest-earning managers.

Citadel's Kenneth Griffin, who started trading from his Harvard dormitory in the 1980s, and Renaissance Technologies' James Simons, a former code breaker who launched his fund in 1982, each took home $1.7 billion in 2015 to tie for top honors. In 2014, they also took home 10 figures each but slightly less than in 2015, to claim the No. 1 and No. 2 spots.

Bridgewater's Raymond Dalio, Appaloosa Management's David Tepper and Millennium Management's Israel (Izzy) Englander rounded out the top five spots, with each man making more than an $1 billion in 2015, the survey shows.

The higher payday came "despite the fact that roughly half of all hedge funds lost money last year," said Institutional Investor Editor Michael Peltz. He added that "about half of the 25 highest-earning hedge fund managers used computer-generated investment strategies to produce their investment gains."

The lucrative pay came as the average hedge fund lost 1 percent in 2015, with some managers, including David Einhorn, Larry Robbins and William Ackman losing much more than the high-earners took in. Ackman and Robbins, who ranked in the No. 4 and No. 7 spots in the previous Rich List did not make the recent roster.

Instead, John Overdeck and David Siegel, who run the data and technology-driven investment firm Two Sigma, made an appearance for the first time, earning $500 million each. Their firm produced positive returns of 13 percent and 14.5 percent in two of its funds through November, according to return information seen by Reuters. The firm's assets were up more than 29 percent to $31 billion as of Nov. 30.

Millennium's Englander, who has made the list previously, also reached a personal milestone by topping 10 figures with compensation of $1.15 billion after his firm's multi-strategy funds gained 12.5 percent in 2015.
Alexandra Stevenson of the New York Times also reports, Hedge Funds Faced Choppy Waters in 2015, but Chiefs Cashed In:
JPMorgan Chase paid its chief executive, Jamie Dimon, $27 million in 2015. In another Wall Street universe, the hedge fund manager Kenneth C. Griffin made $1.7 billion over the same year.

Even as regulators push to rein in compensation at Wall Street banks, top hedge fund managers earn more than 50 times what the top executives at banks are paid.

The 25 best-paid hedge fund managers took home a collective $12.94 billion in income last year, according to an annual ranking published on Tuesday by Institutional Investor's Alpha magazine.

Those riches came during a year of tremendous market volatility that was so bad for some Wall Street investors that the billionaire manager Daniel S. Loeb called it a "hedge fund killing field." A few hedge funds flamed out; others simply closed down. Some of the biggest names in the industry lost their investors billions of dollars.

Yet for the biggest hedge fund managers, these men (and the occasional woman) have more money and more influence than ever before.

Their firms do more business in some corners of the financial world than many banks, including lending to low-income homeowners and small businesses. They lobby members of Congress. And they have put large sums of money behind presidential candidates, at times pumping tens of millions of dollars into super PACs.

The hedge fund industry has now ballooned in size, to $2.9 trillion, from $539 billion in 2001. So, too, has the pay of the industry's leaders.

When Institutional Investor first started ranking hedge fund pay 15 years ago, George Soros topped the Alpha list, earning $700 million. In 2015, Mr. Griffin, who started trading as a Harvard sophomore out of his dorm room, and James H. Simons, a former math professor, each took home $1.7 billion, according to Alpha magazine. The two topped the list last year, too.

Mr. Griffin's firm, Citadel, has grown from a hedge fund that managed family and pension fund money into a $25 billion firm that has expanded into the securities business, taking business away from the brokerage units of banks like Morgan Stanley and Goldman Sachs. Along the way, his own personal wealth has grown exponentially, and is estimated by Forbes at $7.5 billion.

He recently made headlines when he paid $500 million for two pieces of art. In September, Mr. Griffin, 47, reportedly paid $200 million to buy several floors in a new luxury condo tower that is being built at 220 Central Park South, in Manhattan.

Yet it is arguably on the national and political scene where his money has had the most impact. He was the biggest donor to the successful re-election campaign of Mayor Rahm Emanuel of Chicago. More recently he has poured more than $3.1 million into the failed presidential campaigns of Marco Rubio, Jeb Bush and Scott Walker, as well as the Republican National Committee.

Citadel's flagship Kensington and Wellington hedge funds returned 14.3 percent over 2015.

Renaissance Technologies, the hedge fund firm started by Mr. Simons in 1982, uses computers to track and outsmart the stock market. It is a strategy that has worked well. The main Renaissance funds gained between 15.6 percent and 16.5 percent.t and 16.5 percent.

Mr. Simons, 78, has been a major political donor of the Democrats, donating $9.2 million in 2016, including $7 million to Priorities USA Action, a super PAC supporting Hillary Clinton.

Robert Mercer and Peter Brown, co-chief executives of Renaissance, also made the list this year, each earning $135 million in 2015. Mr. Mercer emerged last year as a major donor to Ted Cruz's presidential campaign, and also gave to Bobby Jindal and Carly Fiorina, pumping $11.3 million into the election race.

To come up with its estimates, Institutional Investor's Alpha calculates the gains on each manager's capital in their funds in addition to their cut of the fees they charge. On average, investors pay an annual management fee of 2 percent of total assets under management and 20 percent on any gains.

Among 2015's top hedge fund earners are five men who actually lost money for some investors last year but still made handsome profits because their firms are so big.

Ray Dalio, 66, made $1.4 billion in 2015 through Bridgewater Associates, the world's biggest hedge fund firm with $150 billion of assets under management. Mr. Dalio, who founded Bridgewater, is frequently quoted promoting a strategy he calls risk parity. Yet Bridgewater's risk parity fund, called All Weather, lost investors 7 percent in 2015.

Still, two funds using a different strategy had gains: Pure Alpha II was up 4.7 percent, and Pure Alpha Major Markets was up 10.6 percent for the year.

Mr. Dalio's associates and Bridgewater co-chief investment officers, Robert Prince and Greg Jensen, also made the top earners list, with each bringing home $250 million.

Bridgewater was thrust into a spotlight this year when The Wall Street Journal reported that there was a schism between Mr. Dalio and Mr. Jensen, who had been largely seen as Mr. Dalio's successor. Soon after, Mr. Jensen stepped away as co-chief executive, and Bridgewater hired Jon Rubinstein, a former high-ranking Apple executive. The move further fueled questions over whether there had been an internal power struggle at the firm. Bridgewater denied that anything was amiss. Mr. Jensen remains co-chief investment officer.

For many managers, collecting large pay, even when performance was not tops, has become a side effect of growing bigger.

"Once a hedge fund gets to be large enough to produce incredibly outsized remuneration, the hardest part of due diligence is determining whether the investment process is affected," said Todd Petzel, chief investment officer at the private wealth management firm Offit Capital.

"Is the goal to continue to make money in a risky environment or is the goal to preserve assets on which you collect fees?" Mr. Petzel added.

Other managers hauled in large pay packages despite losing some of their investors money.

Daniel Och, the founder of the Och-Ziff Capital Management Group, made $140 million in 2015. His firm's flagship fund, OZ Master Fund, lost 0.28 percent last year. Other funds within the firm fared well, with its OZ Asia Master Fund up 9.64 percent.
After reading these articles, you quickly realize that Thomas Piketty should rewrite his seminal treatise on inequality to include a discussion on hedge fund and private equity titans. The very best of them are making an obscene amount of money that would make Sam Walton, Steve Jobs, Henry Ford, John D. Rockefeller, Walt Disney, and Ray Kroc turn in their graves.

The irony is that public pension funds around the world led by the ones in the United States are investing billions in these alternative investment shops, fueling massive inequality. The so-called death of 2 & 20 is nothing more than rhetoric; hedge fund chiefs are still making off like bandits. This is yet another reason why I don't pity hedge fund managers and think a lot of these gurus are outrageously overpaid and overhyped.

Who cares? That's capitalism, the best of the best rise to the top and make Fortune's silly annual list of the world's richest people. Like Bobby Axelrod says in the show Billions: "When did it ever become a crime to succeed in this country?" 

Well it turns out it's not that easy because as I keep harping, a huge chunk of the revenues generated by very large hedge funds comes from that 2% management fee they charge their institutional clients. Even if it's 1% or 1.5%, when funds are managing multibillions, they still collect that management fee no matter how poorly they perform.

Again, do the math. Bridgewater manages $150 billion Forget 2%, let's say it collects only 1% in terms of its average management fee. That's $1.5 billion merely for "breathing air" as Warren Buffett recently stated in his epic rant on hedge funds (and I'm pretty sure Bridgewater collects a lot more than that amount in management fees alone).

This example merely illustrates a point I'm trying to make. When hedge funds get too big -- partly because of their track record but also because of their ability to market themselves to useless investment consultants and dumb institutional clients jumping on the latest hot hedge fund they should be avoiding -- their incentive is to focus mostly on "business development" (a euphemism for asset gathering), not performance. This throws their alignment of interests out the window.

Wait a minute, don't hedge funds have skin in the game, ensuring alignment of interests? Yes but they have a lot more skin in the game early on when the fund is getting up and running than what they have when assets start mushrooming way past the billion dollar mark.

This is why I've long argued that hedge funds shouldn't be charging any management fee whatsoever once they're performing well and assets under management pass a certain threshold (we can discuss what this should be but it needs to be implemented by all investors). Even that 20% performance fee for leveraged beta is a slap in the face in a deflationary world but at least they earn that one as opposed to feeling entitled to get it like they do with that management fee.

Interestingly,  following my comment on the death of 2 & 20,  I received a message on LinkedIn from a risk manager of a major US public pension fund asking me what I think of "risk mitigation buckets" that CalSTRS and others are implementing via investments in global macro and CTA funds. He told me consultants have been pushing these strategies hard on US public pensions.

I told him flat out that I'm inherently suspicious of any risk mitigation strategy consultants are peddling and think it's yet another excuse to shove billions into hedge funds, enriching the Wall Street mob milking public pensions dry.

I also told him even if ultra low or negative rates are here to stay, the ultimate risk mitigation strategy when the deflation tsunami strikes will be good old US nominal government bonds (TLT not Hotel HYG that big funds are flocking to in record numbers). But you will never hear anyone on Wall Street peddling boring government bonds to any investors because there are no big fat fees involved. Instead, Wall Street's chief banker is warning us of a rout in Treasuries (I'll take the opposite side of that bet any day!!).

What I find absolutely infuriating is while consultants are peddling "risk mitigation buckets" to public pension funds, the hedge funds they're recommending have a built-in risk mitigation strategy in the form of a big fat management fee which they collect no matter how poorly they perform. And this helps them absorb the blow in bad years and it ensures the ongoing bifurcation of the hedge fund industry where the big funds get ever bigger.

Like I stated, pay people for performance, not asset gathering. And in a deflationary world, you need to negotiate hard on all fees, not just the management fee. If you can't negotiate down fees, you have no business whatsoever investing in hedge funds. Period.

I'm utterly dismayed at how many US public pensions are getting roiled by hedge funds promising them the moon and the sun but failing to deliver consistent alpha in all market environments.

I know, you need to make that delusional 8% 7% bogey but stop falling in love with hedge fund gurus and start grilling them no matter how well or how poorly they're performing. As you can read, these guys (and they're almost exclusively alpha males) are enjoying unfathomable wealth, much of it earned by hard work and investment acumen, but a lot of it earned through pure marketing hype.

So the next time Ray Dalio shows up at some conference to defend Bridgewater's unique culture, tell him you're not interested in radical transparency nonsense and ask him straight out: "Ray, what have you done for me lately? Are you guys getting too big? Who's this new Apple executive you hired and how is he going to get you guys back on track?!?"

And trust me, I might be picking on Ray Dalio but I like him and his fund a lot, which is why I can't stand reading nonsense about Bridgewater. I'm a lot more critical of other hedge fund "gurus" making pathetic and lame excuses for their underperformance.

As far as the hedge fund rich list, not surprisingly, some within the industry think it's much ado about nothing. I beg to differ and think they are missing the bigger picture, namely, US public pensions need fixing and investing more in hedge funds isn't the solution as it disproportionately benefits ultra rich hedge fund titans and doesn't address chronically underfunded public pensions.

Ken Griffin and Jim Simons topped the list last year because Citadel and Renaissance Technologies were among the top performers of 2015. This year is proving to be a lot more challenging for large multi-strategy hedge funds like Citadel, many of whom got clobbered in the first quarter. But I guarantee you Griffin will collect that big fat management fee no matter what and keep funneling money to Rahm Emanuel who is having no luck addressing Chicago's pension nightmare.

In fact, what really irks me is while everyone is focused on fixing the US public pension crisis, nobody dares raise a peep at the outrageous fees hedge fund and private equity "superstars" are charging their clients. They then use those profits to fund Republican and Democratic candidates of their choice, ensuring the quiet screwing of America continues unabated.

This why I'm not too concerned about regulators clamping down on hedge funds to treat their investors better (fiduciaries should read this comment by Susan Mangiero). It's all a farce, a big fat smokescreen to make it look like they're doing something when in actuality, the rich and powerful hedge fund titans are becoming richer and more powerful by the day.

Meanwhile, the United States of pension poverty is getting a lot poorer by the day and instead of adopting a revolutionary retirement plan which will benefit all citizens, we have retirement solutions that are centered around Wall Street, not Main Street. In others words, don't rock the boat, keep the status quo for as long as possible so all these alternative investment shops can continue collecting big fat fees no matter how poorly they perform or how terribly their big public pension clients are doing.

Below, a rare interview with Jim Simons, the mathematician who founded the quantitative powerhouse known as Renaissance Technologies. Simons made $1.7 billion last year, according to Institutional Investor.

Simons is the only manager to make the list all 15 years the list has been published, and also ranks top for earnings during the history of the rich list. He has made an estimated $23.5 billion in that time and has given a lot of that money away to various charities that promote education, health and scientific research. 

Also Michael Peltz from Institutional Investor reveals this year's top hedge fund earners, including Citadel's Ken Griffin, Bridgewater's Ray Dalio and Appaloosa's David Tepper.

I listen to this and think to myself maybe Canada's pension plutocrats are grossly underpaid because many of them are delivering better long-term risk-adjusted returns than these big hedge funds who have become nothing more than glorified asset gatherers charging alpha fees for leveraged beta.

As far as the American dream, Noam Chomsky is right, it, not the 2 & 20 model fueling massive inequality, is dead. But long before Chomsky's new documentary and Bernie "we have a YUGE inequality problem" Sanders, there was another fellow called George Carlin who pointed all this out to us years ago in his classic skit on the American dream (ironically, I'm pro-American!!).

That's why when people ask me about hedge funds and public pensions, I tell them: "Like politics, it's all bullshit and it's bad for you." And that my dear Ray Dalio is real radical transparency!




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