Take David Tepper. He’s one of those hedge fund guys. He “earned” $2.2B last year. $2,200,000,000. That comes to “a little bit” over a million dollars an hour. That “little bit” is some $57K, actually, which is about the average annual income of an American family. Well, actually, that “little bit” is about $7,000 more than the average annual income. So each hour Tepper makes as much as 21 families earn all year, and each year he “earns” as much as 44,000 families. There’s also a bunch of other hedgers with take-home of nine or ten figures. Inequality, what inequality? The monthly TANF income for a family of four is less than what the average member of the Forbes Top 20 made in one second at the office.
Of course, no one can actually earn that kind of money. You can only get it if you spend your days manipulating other people’s money with the purpose of extracting a little bit of it from each of the rest of us. No one who actually performs useful work can earn anywhere near that much.
A million dollars an hour.
Hedge funds work in secret, and won’t tell you a thing about what they are doing, even if you have a million dollars invested with them. That’s because they are betting something bad will happen to a company everyone else expects will be OK. So they bet against it, and if the bad thing does happen they profit big from it. If those to whom the bad thing would happen are tipped off, they would correct their behavior, so it must be secret.
There’s no set way to hedge, but essentially, you invest in a corporation, say, only you are pretty sure the stock value will tank, for whatever reason. Next you take a whole lot of other people’s money, the more the merrier, since it’s other people’s money. You figure out a way to bet that the corp’s stock will tank. There’s no set way. It might be buying insurance, or buying futures, or short-selling. The thing is, you have to set it up in secret that you are betting against the corporation, and when the stock falls, the payoff is usually very large. But you can also lose every penny. Hedge fund managers are risk tolerant, since they’re gambling with other people’s money.
Hedge funds work in secret.
A hedge fund manager typically gets to keep 20% of the profit of his bets. You read that right, 20%. So if the bet paid a hundred million dollars, he makes twenty million. And if the bet loses? Surely he must have to pay twenty million, right? Hah! They never get less than zero. That’s why they can afford to take big risks.
Hedge funds were unregulated until 2010, so it was perfectly legal to gamble with other people’s money and lose it—which they did, spectacularly, in 2008. Or to invest the returns in the Caymans, keeping one of every five dollars, of course. It’s the client who has to pay taxes. Unless, of course, the clients also invest in the Caymans, which they do. Some of the worst of these abuses have been mildly curbed since then. Some of them.
Hedge funds were unregulated until 2010.
It was perfectly legal to gamble with
other people’s money and lose it.
What is it that hedge funds do for society? Nothing, actually. Nothing at all. They completely fail the test of social utility, contributing nothing worthwhile at all to society as a whole. They are just toys that the very rich can use to get very richer, giving the managers incomes like that of a small nation.
And what can billionaire managers do with this money? Nothing, really. It has neither social nor personal utility. As an exercise in imagination, try spending a billion dollars on yourself and your family some time. You simply can’t. You very quickly run out of things to spend it on. So for hedgers, making big bucks is the game. There’s no real reason for it. If the money extracted from society weren’t so important to the rest of us, it would be rather like some sort of bizarre contest. Like the extreme sports people. Like junior high boys who have contests to see who can steal the most CDs.