How an 8 (or 10) figure income can make sense
May 24th, 2007 | Filed under: Investment Management FeesKudos to the New York Times’ David Leonhardt for stating an uncomfortable, yet accurate economic truth about hedge fund compensation. In response to Alpha Magazine’s newest hedge fund rankings, he wrote yesterday:
“I realize that a lot of people find 9- and 10-figure incomes to be inherently excessive. Or even immoral. From a strictly economic point of view, however, they are also perfectly rational. You cannot find anyone else who is providing the same returns as the best hedge fund managers at a lower price. If you don’t like it, you don’t have to give them your money.”
For a supposedly liberal news outlet, the NYT has approached this topic with refreshing clarity. In New York Magazine’s feature on the industry last month, economist Tim Harford said:
“Ultimately, investors have to decide which funds make the fees worth paying. Some fees might eventually be lowered, but those tempted to do that might choose to simply close their doors. Despite the boom, some funds have already done that. That’s exactly what we’d expect from a competitive industry that refuses to cut prices. The laws of economics haven’t been suspended, after all.”
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