What would you think of him if he lost 3.7 billion?
TPain88: “EVERYONE IS FREE TO DO THE SAME THING HE DID!! Be inspired…not bitter…” Im no expert in hedge funds (or finance for that matter), and even though hedge funds are less regulated then mutual funds, it is not easy to become the lead portfolio manager of the fund, let alone have the contacts or your own money to start one. You most likely need really good contacts to get to that position along with that Top 10 Mba. CFADummy: “What would you think of him if he lost 3.7 billion?” If he lost money, he would still collect a 2% management fee but would not incur any of the losses (he gets 20% if the fund makes a profit - and I am not thinking about how much he has invested his own money in it).
CFAdummy Wrote: ------------------------------------------------------- > What would you think of him if he lost 3.7 > billion? I wouldn’t think much of it. Just another hedge fund gone terribly wrong!
CFAMaven Wrote: ------------------------------------------------------- > TPain88: > “EVERYONE IS FREE TO DO THE SAME THING HE DID!! Be > inspired…not bitter…” > > Im no expert in hedge funds (or finance for that > matter), and even though hedge funds are less > regulated then mutual funds, it is not easy to > become the lead portfolio manager of the fund, let > alone have the contacts or your own money to start > one. You most likely need really good contacts to > get to that position along with that Top 10 Mba. This guy copied his trades on his own. Not quite a $3 billion year, but $500 million would be enough for me. http://online.wsj.com/article/SB120036270913390155.html You do not need to be a fund manager, just wealthy enough to convince banks that you could have been a counterparty in the trade.
CFAMaven Wrote: ------------------------------------------------------- > TPain88: > “EVERYONE IS FREE TO DO THE SAME THING HE DID!! Be > inspired…not bitter…” > > Im no expert in hedge funds (or finance for that > matter), and even though hedge funds are less > regulated then mutual funds, it is not easy to > become the lead portfolio manager of the fund, let > alone have the contacts or your own money to start > one. You most likely need really good contacts to > get to that position along with that Top 10 Mba. > True but nothing’s easy in life. Getting a job in finance isn’t easy. Getting a CFA isn’t easy. The point is, we all have the FREEDOM to do it. And I didn’t mean “bitter” as a joke…ha although I am from PA…I happen to like Obama.
Here you go, this is how to do it: "In [a] hypothetical example, a fund manager named Oz sets up a $100 million hedge fund with the goal of earning 10 percentage points a year above the 4% annual yield of one-year government bonds. The fund will run for five years and charge a management fee of 2% of assets and an incentive fee of 20% of any profits that exceed the bond yield. "Oz creates and sells a series of ‘covered calls’ and sells them for $11 million. Each call is a stock option that will pay the investor who bought it $1 million if the stock market rises by a given percentage. Using historical information, Oz figures there is only a 10% probability the market will rise that much. If it does, the hedge fund will be virtually wiped out by being forced to pay $111 million to the call owners. If it does not, the fund will pay nothing - and the $11 million received from the call buyers will be profit. "Oz now has $100 million received from his investors, plus $11 million from the options sales. He invests the $111 million in risk-free U.S. Treasury bills earning 4%. After a year, the fund thus grows to $115.5 million. To his investors, this is a 15.5% return on their original $100 million. "Oz earns his 2% management fee on the $115.5 million, plus 20% of the return exceeding what came from the 4% Treasury yield - or 20% of $11.5 million. "There’s a 59% chance this process can continue for five years without a market downturn annihilating the fund, allowing Oz to collect $19 million in fees, as compounding makes the fund grow larger and larger. If the market does crash, Oz can close the fund, leaving the investors with devastating losses but keeping the fees he’s been paid to that point. "This simplified ‘piggy-back strategy’ involves no borrowing, or leverage. A real-world manager could inflate his incentive fee by borrowing money to increase the size of his bets, though that would deepen the investors’ losses if things went wrong. “The bottom line is that Oz’s investors, who don’t know what he is doing, may well believe his market-beating results come from brilliant stock picking or other wizardry. In fact, anyone could set up this simple strategy. Moreover, the investors are in the dark about the risks they are taking. They might well assume that if they make in excess of 15% one year, they might lose 15% in another. In fact, there’s a 10% chance they will lose more than 95% of the money they put in.”
Frankly I think it’s a good sign that there is disagreement here about this issue. I am on the fence about this, but one thing I do resent is the idea that anyone who questions whether or not it’s right for one individual to make this much money in a year is “bitter” or “jealous”. I think that is naive, and may reflect a self-centered view of the world. I have much respect for Paulson as an investment professional and feel he should be richly compensated for the returns he generated for his investors. As an investment professional myself I fully recognize the societal value of what we do, which I see (ideally at least) as greasing the wheels of the machine that marries suppliers and users of capital, ultimately promoting economic growth, creating jobs and raising the standard of living of the entire population. It’s just the sheer magnitude of the numbers that give me pause. I mean even Bill Gross is on the tape describing this figure as ugly, and the guy makes eight figures. Right or wrong, it’s beyond the eight figure mark that I start viewing comp as just grossly out of line. When I read about hedge fund managers building their modern art collections I start to wonder if something is wrong with the compensation and tax structure of the industry. It’s tough though, because I also recognize the problems that arise when you start to interfere with free markets. As strange as it may be, I’m sort of with kkent on this. I don’t know the solution, but when the numbers get this big it starts making me uneasy.
I just had a meeting with a highly respected long only fund manager. It was funny watching him explode in fury at the mention of the word “hedge”. He made a fair point though, and newsuper’s example illustrates really well how there is a massive agent/principal issue with the embedded options in the fee structure. But that’s why you need to do your due dilligence in the first place. Caveat emptor et cetera ad nauseam. If you just chuck money at a hedge fund manager because he made 25% last year with 5% vol without checking under the bonnet, then you deserve what you get. (which is Peloton, EuroHedge newcomer of the year 2007!)
Newsuper borrowed that example from somewhere else, and I think its been posted here before. I won’t bother going through how flawed the example is, but I believe he put it up more as a joke.
I didn’t suggest it was a real example - but there are plenty of real examples out there of funds that have made high returns with no vol, only to go pop. And yes I know the options would have to be market to market, and this wouldn’t really work, but it still illustrates a point.
newsuper Wrote: ------------------------------------------------------- > Here you go, this is how to do it: > > "In hypothetical example, a fund manager named Oz > sets up a $100 million hedge … This is stupid. First, it’s stolen from a FT article. Second, it sets up about 6 strawmen. His investors WOULD know what he was doing, and anyone who didn’t would deserve to lose their money. You’ve also butchered the numbers from the original, which I have already deconstructed to show their math was tenuous at best. Someone else mentioned this and CM above reiterates the idea - how do you distinguish luck and skill, or as I like to call it, levered beta versus alpha. This is a large issue in investment management, as you all should know. When I hear Brian Hunter once again made hundreds of millions playing NG futures, I’m highly suspicious. However, when someone as respected as Paulson (the guy was already a hedge fund BSD) does it on something like this, I’m inclined to give him the benefit of the doubt.
i’m shocked this is a conversation. why does someone else making a lot of money make you uneasy? he entered into private contracts with other people/institutions and things went well. he took a risk and it paid off. yes, those who invested their money with him had more to lose but they knew the relationship going in. no one forced them to give him their money. luck or skill, it doesn’t matter. you don’t think bill gates has as much as he has because of some luck? right place, right time. and don’t bring up warren buffett either. i don’t know his story as well as some others, but i’m certain (and i bet he’d admit it too) he got lucky a few times over the years. read fooled by randomness. taleb has some good ideas. so those of you who are uneasy with someone making a lot of money, what is your proposal? higher taxes? penalize his success (or luck)? why? just to take it from him to give to someone else? like someone else mentioned, tax competition is real. if he leaves for a more tax-friendly place, we lose access to his brain and his taxes. and someone else mentioned that you may not deem the charities he gives to as being worthy. why is that your place. if he gives to a pro-choice (or life) group and you differ in opinion, why does that make his contribution worth less? it isn’t yours or anyone else’s place to determine the worthiness of another’s charitable contributions. in my opinion, the government is the least worthy place to give more money, so it pretty much can only get better from there. i’d rather not give (involuntarily, mind you) to a group of people who give that money to farmers in subsidies, burn through half and then fund underperforming schools, spend all kinds of money on useless earmarks, and an insane number of bureaucracies. at the end of the day, we don’t need to be so free with other people’s money. if he made it legally, and it appears he did, without coercing anyone, why do we care? sure, he could do a lot of good with it if he gave it all away. he could also do a lot of good if he kept investing. if he waits until later in life (like warren buffet) to give it away, that’s his prerogative.
CFAMaven Wrote: ------------------------------------------------------- > John Paulson of Paulson & Co. took in a record > $3.7 billion. Mainly by betting against mortgage > debt products. > > Top finance guy George Soros made 3 billion. > > What do you guys think, overpaid or deserving the > money due to their funds perfomance? > > Personally, that kind of money is disgusting. You > could find a cure for cancer, and you still > shouldn’t make that much (in retrospect, the > researcher who does find it will probably make a > six figure salary only…) Ok so he made 3.5Billion… if he lost 3.5Billion would you feel that we should “help him out” b/c he lost that money??? Seems kindof ridiculous right? He made the bad bet (hypothetical situation) so why should we pick up his slack? O wait, I forgot theres a double standard.
I’m not at all saying that we should re-distribute wealth or that this guy has no right to have this money. I just think it’s kind of scary to see so much concentrated wealth. Did you see the new Russian wealth rankings? There are more than 100 people in Russia with more than $1 billion, and while I’ve never been to Russia, I know its people aren’t exactly rolling in the doh. Something like 15 or 20 percent of the Russian GDP is concentrated in 100 to 150 individuals. And while American economic growth has been strong over the last 20 years, a disproportionate amount of created wealth is concentrated in a few thousand invididuals and it’s getting worse each year. I just think it’s a less-than-ideal system to have un-elected people with such incredible power. What’s the solution? I have no clue. But I think it’s kind of intellectually lazy to just say, “what’s the big deal, you hippie socialist? He earned it. You must hate capitalism and free enterprise because you question the sheer size of an individual’s wealth.”
on the issue of russia, don’t you think the government/putin has helped design and protect the system to make sure it stays that way? russians aren’t exactly what i call free. on the issue of power, i prefer to take the massive amount of power in our elected officials hands and put it back in private hands. this is an interesting way to look at power: http://www.tcsdaily.com/article.aspx?id=040708A its a simplified approach, but you get the idea. and like someone else said, it isn’t like paulson has this money sitting liquid somewhere. most of it by far is tied up. same goes for mark zuckerberg. forbes (i think) estimates his worth at $1.5 bill or something only because he owns some percentage of facebook that has an implied value of several billion based on microsoft’s investment. it doesn’t mean he has that much to spend. you talk about disparity of wealth like it hurts someone else. why do you think its a problem that needs a solution? now, if he’d lobbied congress to create all kinds of barriers to entry and put price ceilings on his inputs and price floors on what he can charge, that’s a problem that needs a solution. any kind of solution that “fix” the problem of well-paid hedge fund managers would have to either limit the business he can practice, limit the prices he negotiates with others, subsidizes others so they can compete with him, or taxes the stew out him. basically either limit how much he can make or take it away from him once he does.
Personally, if I was invested in a fund that returned over 300% in one year I wouldn’t really mind that the manager took home that much money.
kkent Wrote: ------------------------------------------------------- > What’s the solution? I have no clue. But I think > it’s kind of intellectually lazy to just say, > “what’s the big deal, you hippie socialist? He > earned it. You must hate capitalism and free > enterprise because you question the sheer size of > an individual’s wealth.” It’s a bold statement to call other people intellectually lazy, when you yourself have put forward absolutely no ideas or ways to “fix” this “problem”. I don’t think the creators of capitalism were intellectually lazy, and it’s worked pretty well so far. I’d like to stick with it. Everyone bemoans the growing wealth gap in this, and other countries, but I’d be willing to wager that it was probably worse 200 years ago, and even worse 1000 years ago. This would be due to the concentration of wealth based on monarchies, etc. and also the fact that the poor were worse off relatively than they are today. One thing that changed this was a capitalistic economy that allowed the free flow of funds to people that deserved it, regardless of class, nobility, whatever, and allowed smart, driven people to improve their lot in life where they previously would have been unable to do so.
farney, I was responding to the half dozen comments calling me and others “hippies” or “socialists” for the mere fact of MENTIONING that $3.7 billion is a HUGE sum of money. Not for questioning his right to the money, but the mere idea that $3.7 billion is a huge sum got “hippie” and “socialist”! I’d wager to bet that I’m about 1,000 times more conservative and Republican than almost anyone on this board. It reminds me of the time that I was threatened with death by a militant homophobe because he saw a picture of me posing with my shirt off with some male friends. Ironic given that I’ve spoken out again the practice for years. As to the problem with a concentration of wealth–well, it is a problem. When inflation is pushed by economic growth and a disproportionate amount of that goes to a few, the masses are left with higher prices and not as much income to show for it. Do I have a solution? No, sure don’t. Is it a problem right this moment. Not really. Will it eventually become one over time. You bet.
NakedPuts, I didn’t ‘steal’ it from an FT article - I never claimed that it was my writing, though I probably should have put the link (which was a website called FNArena). I also didn’t butcher the numbers, it’s not possible to that with a simple copy and paste buddy. I only pasted it because I happened to only come across it yesterday and it seemed relevant to this discussion. Anyway, it’s ‘hypothetical’ remember? It’s illustrating a point.
Here’s the original, including the article and my response. http://www.analystforum.com/phorums/read.php?1,672998 As you can see the example depends on significantly more detail than you provide, and even then, I find their math to be highly dubious.