When it comes to hedge fund compensation, “social usefulness” is a red-herring
Jun 18th, 2008 | Filed under: Investment Management Fees
After the release of Alpha Magazine’s rankings of the highest-paid hedge fund managers (e.g. John Paulson of Paulson & Co.), we questioned the uproar over the compensation of some managers. Although astronomical, their compensation fell short of gains logged by entrepreneurs in other sectors (e.g. by Gates, Buffett, Bloomberg, and several lesser-known rich guys).
We proposed a number of hypotheses to explain this apparent double-standard. One was that traditional entrepreneurs created a product or service of tangible value. However, the value created by hedge fund managers (provision of liquidity etc.) is intangible at best. As a result, hedge fund managers are often accused of simply “re-arranging the chairs”, not building them.
But a letter in last Thuraday’s New York Times by John Berlau of the Competitive Enterprise Institute reminded us how traditional entrepreneurs shouldn’t be given a free ride since they create something tangible.
Berlau was responding to a June 10 Times Op-Ed (IHT reprint here) that said:
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