Hedge Funds

The London Paper  –  9 Oct 2006

When the revolution comes let’s make sure it’s those hedge fund boys who are first up against the wall. Never in the field of human capitalism has so much been earned by so few for doing so little. Nowadays, quite a few of these jokers earn more in a week than a teacher or nurse earns in a year. However, whilst I’d like to pretend that my outrage is based on some altruistic wish for a more egalitarian society I’d be fooling no-one (least of all myself) … I’m just jealous.

The simple fact is that five or so years ago when I had a meeting with a client I could generally be pretty sure that I earned more than them. This basic truth ensured that the dynamic of the meeting – an underlying acknowledgement of the broker’s superior status – was as it should be. Those days are sadly gone and I now have to face the humiliation of trying to persuade many clients that they should listen to me when they know full well that their salary dwarfs my own. I go into these meetings feeling about as confident as a baby Chihuahua facing a coked-up Pit Bull.

Hedge funds are generally remunerated by a 2% management fee and a 20% performance fee. This means that a £1bn fund receives £20m a year for doing nothing and 20% of any rise in the fund’s value. So a 12 month rise of 20% in this theoretical £1bn fund should result in around 4 or 5 comedians sharing perhaps £50m for a year’s ‘work’ (though it ain’t exactly smelting iron for a living). In reality, whilst many of these funds are supposed to make a return in all market conditions many seem suspiciously geared to the stock market’s performance. The FTSE 100 has risen 75% since its low in March 2003 suggesting that a £1bn hedge fund that had mindlessly tracked the market since then could have made its owners at least £150m. Hence, many of these clowns have essentially been winning the lottery every year since 2003 for doing diddly squat and that seems to me about as fair as the average Italian football match.

The consequence of this incredible cash generation is not just that Londoners are being priced out of the capital’s property market. It also means that gifted individuals, who in times gone by would have gone on to become great scientists, inventors, doctors or engineers are being seduced by vast potential profits into pointlessly pushing around bits of paper. I have no doubt that the progress of our culture and our society is all the worse for it.

Thoughts ?

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