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Jordan fact of the day
The combined earnings of the world's top 25 hedge fund managers of more than $14bn (£7.49bn) exceeded the national income of Jordan last year and three individuals took home more than $1bn, according to the biggest annual industry survey.
Here is the article, which illustrates the role of powerful capital markets in promoting income inequality. Here is an NYT piece.
What we see are the fearless super-rich having the resources and the liquidity to bid away the equity price premium, plus grab extra profits on the side. Why should they worry about risk? The result is improved resource allocation. The losers are future investors, who now, if they buy, pay higher prices. That means people like me, wealthy enough to be buying equities but not fancy enough to do anything but buy and hold. The investment question is whether the price run-up is mostly over, or whether it has just begun to take off.
Posted by Tyler Cowen on April 24, 2007 at 08:58 AM in Data Source | Permalink
Comments
Real wealth is capable people with the tools and infrastructure required to pursue happiness. The super-rich are really mental patients in a cozy assylum.
Posted by: huggy at Apr 24, 2007 10:05:59 AM
There is a point remembering here that "bidding away the equity premium" is a cylical liquidity story, so one might not see this huge incomes accelerate(might be ven slow down) in the future. If they are improving resource allocation, then it more likely today that that is happening on a global scale, improving world gdp growth and not necessarily of the USA.
Posted by: sa at Apr 24, 2007 10:10:59 AM
Could it be that the rate of return on capitol is increasing? In the future, we will all make such high returns on our equity.
Posted by: jhglassman@cox.net at Apr 24, 2007 10:13:41 AM
I disagree with the point about future investors being the losers.
If hedge fund managers are good, their actions will better allocate capital allowing promising business to grow. And potentially causing poor business to fail. This should lead to a growing overall market.
Posted by: lannychiu at Apr 24, 2007 10:37:11 AM
Having read a few comments here I can not help but to wish for a repeat of Great Depression. Perhaps an experience of utter helplesness would put a little sense in all the hotheads here.
How shallow can humans be to throw financial jargon at each other believing all the while that they are better off then others thanks to their superior intellect. It is the nature of capitalism that someone HAS to be poor in order to keep the system ticking. Anyone who has read anything other than stock market gibberish can figure that out. To all those who think they are clever I suggest to try and make it (renouncing crutches of their western culture and governments) in some great democratic place such as Iraq, Haiti or Nicaragua (all great beneficiaries of US democracy).
Posted by: Dragan at Apr 24, 2007 12:35:47 PM
jhglassman?
Are you the guy who coauthored that "Dow 36,000" book?
If so, 'nuff said.
Posted by: Barkley Rosser at Apr 24, 2007 1:05:44 PM
You lose as a future investor, but win as a future consumer.
I'm more than happy to make that trade, since I enjoy working more than investing. That means while I'll never be super-rich, I'll be able to do more with my salary. Woohoo!
Posted by: Joe Bingham at Apr 24, 2007 2:24:59 PM
I think we need to be careful here. Collectively, hedge fund managers may bid up asset prices, squeeze down the equity premium, and capture fees as a result of that upward trend. However, the capital they are using is mainly not their own. In fact much of it comes from institutions like pension funds. So, in the short run, it is in the interest of the hedge fund managers to bid up asset prices with leverage and the pension funds are happy as well as they own the exact same assets in less exotic forms [ie index funds]. So what's the problem? Well if things get too overvalued, the unwinding of these trades will not look so pretty. And the hedge fund managers will get to keep most of their fees, except for those with "clawback" provisions in their agreements. So, it's right to say that the hedge fund managers mostly need not worry about risk, but the investors in hedge funds are in large measure ordinary investors at the end of the day, and they also own many of the same assets in alternate form. This could be a big problem for them.
Posted by: JPC at Apr 24, 2007 3:10:22 PM
Where would a hedge fund manager but those fees that they earn? Not in a savings account. In facts most of the hedge fund managers tend to reinvest their fees back into their own fund. It's good for marketing to say you have most of your net worth invested along side your investors. Also being a hedge fund manager requires that you have a high degree of confidence in your own investment decision making process so it would seem to be the best place to put $1bn. So if there is a major market crash it is likely that a lot of fees earned would disappear.
Posted by: asiequana at Apr 24, 2007 3:25:34 PM
No doubt hedge fund managers have a lot of their money in their own funds, but if they have 100mm parked in bonds somewhere the personal impact of any disaster befalling their funds is small. And quite typically, they will close up the fund and start another one down the line. The point is that with the size of the funds, leverage, and fee structures, it only takes one or two good years for a large hedge fund manager be fairly risk insensitive from a personal point of view, while many of his co-investors are not necessarily at the same risk aversion point from a wealth perspective.
Posted by: JPC at Apr 24, 2007 3:50:17 PM
I doubt the 25 hedge fund managers put together have an average return for their customers better than the S&P 500. Their business is a con. They hide the costs successfully and grow rich on others' losses. 'Twas ever thus.
Posted by: Robert Speirs at Apr 24, 2007 4:31:42 PM
Simons has been averaging greater than 25% returns for the past 15 years. Get a clue.
Posted by: The Utilitarian at Apr 24, 2007 6:30:44 PM
The equity premium has been *huge* in the last 50 years. But there's still a long way to go before things get close to what current models predict.
That said, I'm not confident about the state of our knowledge and real understanding of the equity premium. I suspect that some thick tail analysis would go a long way toward explaining at least some of the premium.
To get an equity premium of around 1% (as the expected utility models predict), we'd need to see PEs in typical (not high growth) industries get to around 30-40 in today's interest rate climate. If this is really what's happeningm, and if the equity premium really "should be" around 1% -- it's *spectacular* news for today's long investors, who are going to make a killing riding this arb.
Even tomorrow's investors really don't have it that bad in this scenario. Purely passive[*] investors get hosed, but really all they are losing is the ability to collect exorbitant capital rents. The ability make fortunes by creating wealth gets *easier*, not harder. And as the return on passive capital gets smaller, the return to workers and to investors who add significant wealth creating knowledge should get bigger. Suppose I start a company -- after 5-10 years, I have profits of .5 million/year and no significant assets other than goodwill, and let's say this is no longer (or never was) a high-growth industry. Under the very old rules, I can sell out for around 2-4 million dollars (4-8x profits). Under the current market which much more private equity available, I may be able to get 5-10 million (10-20x profits). If the equity premium goes to 1%-ish and those kind of multiples are available across the board even to smaller companies, then I might get 15-20 million.
Of course, under this scenario, seed money and venture capital will become cheaper and cheaper and more and more available, which means there will be more and more competition for early stage investing. It will be interesting to see how it all shakes out.
Posted by: Michael Sullivan at Apr 25, 2007 1:10:29 PM
大家好，我是臺灣人，從臺灣一個人搬家來到美國，環境很陌生，感覺很孤單。以前在臺灣幾家知名的徵信社工作過，我是一個優秀的徵信工作者，希望早點找到適合自己的工作。希望通過貴站，認識更多的朋友。
Posted by: 謝文豪 at Apr 2, 2008 2:33:14 AM
