Hedge Fund Managers Had Great Year in 2011 Despite Lackluster Returns

It seems to be the refrain of the new economic climate- when it comes to recruiting bankers and managers of hedge funds, compensation matters, but we don’t tie that to any sort of performance expectation.

Part of the enduring legacy of the “too big to fail” crisis and the subsequent multi-hundred-billion and trillion dollar bailouts (both the publicized ones as well as the under the table stuff we didn’t actually know about) was that while we relentlessly slashed social programs, education, Medicaid- the list goes on- managers of hedge funds and bankers could not be expected to go without their bonuses. Because in the future, we may not be able to recruit top talent to crash and burn our entire economy again!

The New York Times explained how hedge funds managed to make up the difference in years with less impressive returns, crediting the gains to “the fees they charge pensions, endowments and wealthy individuals to manage money.” The paper illustrates how this translates to high yields for managers of hedge funds:

“Paul Tudor Jones II charges a 4 percent management fee and takes 23 percent of any profit. So he made $175 million in 2011, although his main fund tracked the returns of the Standard & Poor’s 500-stock index. Steven A. Cohen, whose firm, SAC Capital Advisors, keeps 50 percent of the profit, earned $585 million.”

The Times spoke to mutual funds manager Bradley H. Alford, who commented:

“The industry’s fees and performance are so out of whack it’s unbelievable… Fifteen years ago, you got double-digit performance for those fees, but last year, the S.& P. was positive and hedge funds were negative. There’s no alignment with the fees.”

Still, 2011 wasn’t as fruitful for managers of hedge funds as 2010. Only three hedge fund managers “earned” more than a billion dollars in compensation, compared to 2010, when the number was six.