Thursday, August 25, 2005

From the databank: hedge funds

Number of hedge funds reported by The Wall Street Journal to have set up shop in Greenwich, Connecticut, in the last few years:
More than 100*
*The office of Bayou Funds was located just over the Greenwich border on the Stamford shoreline.

The New York Times estimate of the total number of hedge funds at year-end 2004:

Total number of hedge funds as estimated in today's Wall Street Journal (subscribers only):
Over 8,000

Total assets held in hedge funds at end of 2004:
Over $1,000,000,000,000

Average earnings of a top-25 hedge-fund manager in 2001:
Almost $136,000,000

Average earnings of a top-25 hedge-fund manager in 2004:

Amount earned last year by Greenwich resident Edward Lambert, called world's highest-paid hedge-fund manager by Institutional Investor:

Number of cases brought by the SEC, 2000-2004, alleging fraud by hedge-fund advisers:

Total amount that the SEC alleges hedge-fund investors lost through fraud:
Over $1,100,000,000


JLM said...

Are hedge-fund managers really worth $100 million or $200 million per year? Yes. Otherwise, they would not exist. Keep in mind that they're mostly entertainers, not mere money managers. As money managers they would be back in the pack of underperformers, according to this article in today's New York Times:

"While hedge funds produced stellar returns in the years immediately following the bursting of the Nasdaq stock bubble in 2000, more recently many of them have had difficulty outpacing returns in the overall stock market. Last year, the hedge fund index rose 9.6 percent, while the Standard & Poor's 500-stock index increased 10.9 percent."

Jim Gust said...

Have these funds thrived simply because they are less regulated than the mutual funds? Or is it the high minimums, assuring that one is in the company of the the rich, that provide most of the allure? Given that hedge fund managers represent the triumph of hope over experience, what will happen when a couple of these funds pop? Will there be a stampede for the door?

JLM said...

From an article in today's New York Times:

"Private equity fees - and hedge fund fees - are remarkably inelastic. Private equity funds under $750 million in size generally charge a 2 percent management fee and a 20 percent carry, or the percent of profits to be taken after a certain rate of return. That has been true since they were created, regardless of performance. The first hedge fund manager took home a whopping 20 percent of profits. Hedge funds today generally charge a 2 percent management fee on top of 20 or 25 percent of profits.

"One answer to why fees are so high today is an imbalance of supply and demand, and fragmentation. Money for alternative assets - private equity, hedge funds, buyout funds - seems to be limitless, so there is no incentive to lower fees. The market is also remarkably fragmented, with hundreds of investors unable to exercise any collective bargaining power."

In other words, there's just too much money sloshing around. Hedge funds do go "pop." The vanishing of the (theoretically) $440 million invested in the Bayou funds is the current example. I saw somewhere that 700 hedge funds a year go belly up, though I assume most of them were able to return at least some money to investors. Hot hedge funds flourish by well-heeled word of mouth. Deceased hedge funds go unmourned and unmentioned ("You think I'm going to tell anyone I lost a bundle in THAT disaster?").