Quite literally. Here's Alpha Magazine's list of the ten hedge fund managers with the highest personal earnings in 2007:
| Rank | Name | Firm Name | 2007 Earnings* |
| 1 | John Paulson | Paulson & Co. | $3.7 billion |
| 2 | George Soros | Soros Fund Management | $2.9 billion |
| 3 | James Simons | Renaissance Technologies | $2.8 billion |
| 4 | Philip Falcone | Harbinger Capital Partners | $1.7 billion |
| 5 | Kenneth Griffin | Citadel Investment Group | $1.5 billion |
| 6 | Steven Cohen | SAC Capital Advisors | $900 million |
| 7 | Timothy Barakett | Atticus Capital | $750 million |
| 8 | Stephen Mandel Jr. | Lone Pine Capital | $710 million |
| 9 | John Griffin | Blue Ridge Capital | $625 million |
| 10 | O. Andreas Halvorsen | Viking Global Investors | $520 million |
*Earnings include managers' shares of fees as well as gains on their own capital.
So how did they do it? This article in The Washington Post explains:
[John] Paulson's feat was even more astonishing because he started 2007 managing $6 billion, not a massive pool of money by hedge fund standards. Over the course of the year, one of his funds earned a whopping 590 percent return, and another soared 353 percent, according to Alpha. By the end of December, his funds' assets were worth $28 billion.
He amassed his winnings by "shorting" securities linked to subprime mortgages. In a short sale, the investor borrows securities -- in this case, subprime mortgages that were widely held by banks, brokerages and other investors -- and sells them to another buyer. Later, the investor must buy those securities back and return them to the original lender. As the subprime market collapsed, the value of the securities fell, and Paulson was able to pocket the difference. The lenders were stuck with the losses.
Several hedge fund managers, including Philip Falcone, who has been challenging the board of the New York Times Co., also profited from the mortgage crisis by betting that subprime debt securities would plunge in price. Falcone earned $1.7 billion last year. Others made fortunes by betting that the prices of commodities such as oil, sugar and corn would rise.
As I've blogged before, the returns to being confident, contrarian, and accurate can be extremely large. I don't begrudge them a dime of their earnings, but there is no excuse to have their fees treated as capital, rather than ordinary, income for tax purposes.
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Redistribution of wealth to the wealthy
Must be nice
Profiting from being "being confident, contrarian, and accurate" is all well and good, but explain to me again how the 2 and 20 commission structure makes sense for anyone but the managers?
That's Rich
That's Rich
How does hedge fund market manipulation benefit us all?
It must be the benefit of the extreme volatility they create in the markets. My favorite is the game they play in the pre-market to run a stock price up (or down) and create panic buying or selling among the small investors. How about the run down of BS stock while the Bear Stearns employees stock accounts were locked to trading? That hedge fund action benefitted so many nice rich people . . .
The only good news is that many of those offshore hedge funds were highly leveraged and got screwed on the subprime mess . . . they reaped what they'd sown, but brought down lots of good people at the same time, and destroyed trust in the financial markets.
Yes, there are many benefits to those unregulated hedge funds . . .
Who's taking the risk?
Let me get this straight, Pete...I get 2% of everyone's investment, 20% of all gains, and personally absorb 0% of all losses...hmmm...where do I sign up? In what possible way does that represent a risk similar to pouring capital stock into a business and then selling it years later? Can I call my salary at a software company a "management fee" and take it at capital gains tax rates? Again, where do I sign up?
And, this "we all benefit" stuff is just too silly for belief...there is no greater good here, it's a bunch of smart guys making a big old pile of cash.
Fees should not be taxed as capital gains
Don't be greedy.
We want to take more money from people earning a 590% return so that the treasury can get a 1.32% return on debt reduction? Their future returns will probably be less spectacular, but it almost certain that top managers will outperform treasuries in the long run. It makes no sense for the government to be greedy and take their money now rather than letting them earn a return so that we will have more to tax later. It is always better to borrow than to tax investors. Nothing crowds out private capital more than taxes on private capital. The tax rate for capital should be zero.
If you are worried about people becoming too rich, just remember that one of the investors on this list tried to buy the 2004 election and failed miserably.
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