There is nothing new about hedge fund managers "pocketing" billions. George Soros and Warren Buffett got that in their "paychecks" for some years in the 1990s. Jesse Livermore "took home" over $100 million in 1929 for running his hedge fund which is far more than a billion in today's money. The highest annual "compensation" ever received by any hedge fund manager was the original market wizard Munehisa Honma.
James Simons, founder of Renaissance Technologies, was "paid" $1.5 billion last year. As with ALL real hedge fund managers he eats his own cooking. He is the largest investor in Medallion Fund which is the world's best quantitative hedge fund. The fund performed well so he had investment gains. It was NOT salary. Yes some "income" came from fees but that reflects the demand and the hard work entailed in generating CONSISTENT absolute returns and the quality of employees. Senior management having SUBSTANTIAL personal assets in the fund is mandatory alignment with clients.
Jack Bogle, founder of Vanguard, prefers "cheap" index funds. I don't know why as they are risky and expensive considering the large losses, little "work" involved and lack of skill. If a firm "manages" $1 trillion and charges "just" 10bp, that is $1 billion PROFIT every year even when the returns are negative! Lose investors' hard-earned money? It's the market's fault not theirs, right? Get someone else to make a list of stocks for a benchmark, buy them, and then endure many years below the high water mark! Who would invest in such a risky product as an index fund?
The S&P 500 index is just an ACTIVELY managed long only strategy. A hedge fund's franchise is in trouble if it is below its high water mark for even a single year but Bogle's Folly, the S&P 500 index tracker, gets away with not making a cent since last century. Unsuitable for any prudent investor's long term financial goals. Avoid index funds as they cost too much. The fee structure of hedge funds">hedge funds is STILL misunderstood. If the net absolute returns are good the fees are fair.
Financial engineering is no different to mechanical engineering in that you get what you pay for. Performance costs need to be assessed against the quality and engineering of a product. The Trabant and Bugatti Veyron are German cars. You could buy a Trabant for $100 but you can't buy a Veyron for $1 million. So which car is CHEAPER? Which has the better performance? The Bugatti Veyron is the BARGAIN if you consider the VALUE of the product. Which would you invest in? The Trabant index fund or the Veyron hedge fund? 2 and 20 for alpha is a great deal compared to 0.10 for beta.
Good hedge funds">hedge funds are cheap and index funds are a rip-off considering what investors receive. If anything the best hedge fund managers are underpaid. The Medallion Fund returned 29.5% AFTER its 5% and 44% fees. The "highly respected" S&P 500 index fund made a derisory 4.77% this year, had a 50% drawdown again a while back, has STILL not made up for the litany of losses and yet charges an egregious 18bp - for what? Long term investors would have done better keeping their money in the bank for 8 years than gambling their savings away on speculative "passive" funds.
An index fund "manager" on minimum wage is overpaid whereas Jim Simons, relative to his value, is undercompensated. Worrying about hedge fund manager "pay" is like refusing to use Google because Sergey Brin and Larry Page "trousered" over $5 billion each last year. If you don't like that "salary" then don't Google? If you don't want 80% of the profits a talented hedge fund manager makes for you then don't invest alongside them. There are plenty of "cheap" relative return and index funds out there to lose your savings in.
Are good hedge fund managers really paid so highly considering how well their clients do? That money is NOT salary. The hedge fund industry seems to be the only business that considers people successfully investing their OWN money as paid compensation. Those pay figures are not a wage. They are simply a measure of the increase in equity in their own hedge funds">hedge funds.
by Veryan Allen. Copyright 
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