It’s dull out there. OK, so the market has had a bit of a run. But in America’s new mood of puritanism, making serious wonga is way out of style. Unless, that is, you are fortunate enough to run ahedge fund.
According to Alpha, a new publication owned by Institutional Investor magazine, America’s hedge fund players made out like bandits (figuratively speaking) last year, a period when the Standard & Poor’s Index fell 23 per cent and the Nasdaq was off by 32 per cent. On average, the top 25 hedge dudes – and they are all male – each made $110m ( pounds 66m) in compensation last year.
The head of the class was Bruce Kovner, 58, who, through his Caxton Corp, runs the world’s biggest hedge fund (and, for the record, Caxton produced an impressive 26 per cent return for investors in 2002). Through a combination of fees and capital he has invested in his $10bn fund, Alpha estimates Kovner personally took home $600m last year, which, by the way, was on top of $500m he pocketed in 2001.
In the mould of great American plutocrats, Kovner once drove a cab and worked as a Republican strategist. He is now chairman of the Juilliard school for the arts, has converted the former International Center for Photography on Fifth Avenue into his home, has funded production of a limited edition illustrated Bible sold for $30,000 a pop, and is said to play a mean harpsichord.
After Kovner, there was a long drop to second place holder James Simons. But Simons and two other managers all made between $200m and $300m. Meanwhile, a $30m pay cheque earned you the final slot on the top 25 list.
Power rankings are, of course, the candy of financial journalism, but this list is notable for the anonymity of its members beyond their own rarefied world. These are not the exec-celebs or moguls you see beaming with arms folded from the cover of magazines such as Forbes or Fortune. Their “capital management” firms typically have stuffily prosaic names like “Blue Ridge” or “Highridge” and their trading rooms occupy nondescript low-rise industrial parks in leafy suburbs nowhere near Wall Street.
Indeed, it is unknown precisely how much money is in American hedge funds or even how to define the market. The name comes from a brand of investing in which bets would be “hedged” by simultaneously buying certain stocks and selling others short. But today the term really applies to any pool of capital that is investing in everything from bonds to commodities, currencies and assorted derivatives. One of the reasons there is so much mystique surrounding them is that, unlike mutual funds, these firms are restricted from discussing their performance publicly and from advertising. A minimum net worth of $1m is required to invest. However, one increasing and eyebrow-raising trend is that mutual fund companies are selling “funds of hedge funds” to their clientele, which skirts the limits.
After a two-day conference last month on hedge funds held by the Securities and Exchange Commission, it was determined that the size of the market is somewhere between $600bn and $700bn, and new investors are pumping in roughly $25bn more each year. Whatever the sum, William Donaldson, the SEC chairman, subsequently noted to Congress: “It is too much money for us to know as little as we know now about what is going on.”
Indeed, both the SEC and the New York attorney general Eliot Spitzer have been looking into whether or not some hedge funds colluded to drive down the prices of companies in which they had bearish bets.
Anyway, there are two big questions being asked: first, are the financial markets imperilled by the growing influence of these powerful under-the-radar financial entities? It’s only five years, after all, since the derivatives meltdown of Long-Term Capital Management, the former monster hedge fund, nearly ravaged the global financial system.
And, second, if these guys are so brilliant at minting money in good times and bad, should efforts be made to allow ordinary investors in on the action? Consider that while the S&P500 index fell at an annual rate of 16 per cent a year in the three-year period to March 31, the CSFB/Tremont index of hedge funds rose 3.46 per cent.
If the answer is “yes” to either or both of these questions, then efforts to regulate the hedge-meisters are inevitable – which would probably be the beginning of the end for this industry. The reason these cats are so fat is undoubtedly related to the fact they operate in an unregulated environment where big, scary decisions can be made quickly. And, for the most part, the wealthy individuals and institutions that back them want to be part of the wild west action.
So here’s a tip: in the supremely unlikely event that you start seeing Bruce Kovner’s face on a billboard marketing his investment prowess to you, rest assured that the big money game will have moved elsewhere.
