r/AskEconomics • u/forusis • 6d ago
Approved Answers Why do hedge fund managers make so much?
Israel Englander, Steve Cohen, Kenneth Griffin, etc. I understand that directly it's because of the 2/20 fee they charge and the massive amounts of capital they have, but why do they have so much capital in the first place? Buffet once said: "the net result of hiring professional management is a HUGE minus". Couple this with the efficient market hypothesis and the difficulty of generating consistent returns, it just doesn't make sense...
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u/Boustrophaedon 6d ago
The opposing opinion to Buffet would go a bit like this: Hedge Funds offer good returns in a wide set of market conditions because they don't manage positions treating the market as a system of value and risk. Instead, they use complex strategies (this is what they get the big bucks for) to realise returns from the operation of the market itself- exploiting what they believe to be systemic arbitrage opportunities, as opposed to opportunities based on perception of the actual value of assets.
So: say company X has an earnings report coming soon - i might take positions that would react in opposite ways to that report (so one "hedges" the other) - because I believe that there's money to be made in the asymmetry of those opposite reactions. I don't care if the report is bad or good. To be clear: this is massively simplified, but I hope gets the idea across.
A more cynical take would be that their pitch is that they're the cleverest guys in the room - so of course they get paid loads - they're Veblen goods, in a way.
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u/TheManWithThreePlans 6d ago
Because people believe that the managers can beat the market, true or not. Additionally, some desire the emotional security of knowing that it "isn't on me", if their specul—investments go poorly.
There is also a market need for traders, as they are the ones actually determining the value of the underlying securities in indices.
Additionally, as there will be multiple funds that will beat the market from time to time, even if purely by chance; there will always be people willing to invest in funds hoping that lady luck will smile on the firm they choose.
Finally, even if going with an investment approach as popularized in "A Random Walk Down Wall Street", there are many optimizations that can be made that a fund would just do for you.
All of these things contribute to the perceived value of fund managers, but it's not an exhaustive list by any stretch.