October 25, 2014

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How To Make A Million Dollars An Hour, Step 2: Take, Don't Make

Hedge funds are supposed to “reduce the danger that economies will over-respond to shocks.”

Les_leupold

In the second post of a twelve-part series based on Les Leopold's latest book How to Make a Million Dollars an Hour: Why Hedge Funds get away with siphoning off America's wealth, shows how hedge funds increase market risk.

In 2009, David Tepper, the head of the Appaloosa hedge fund, earned an astounding $4 billion. Personally. (That’s $1,923,076.92 per hour.)

The following year, John Paulson of Paulson and Co. broke Tepper’s record, hauling in $4.9 billion, or $2,355,769.34 per hour!

Each firm reportedly earned around $20 billion. More amazing still is that they earned these enormous incomes during the two most horrific economic years since the Great Depression — and they did it with only a skeleton crew.

So, here’s the real puzzle: How did these two hedge funds, which have fewer than 100 employees each, make as much money as Apple Inc., which relies on the hard work of its nearly 30,000 U.S. employees (and the incredible hard work of another 700,000 workers and contractors globally)?

No Sweat Equity

Hint: Produce nothing tangible for the real economy. Don’t waste your time inventing or Million Dollars an Hour: Why hedge funds get away with siphoning away America's wealthmanufacturing stuff. In the hedge fund game, you don’t make—you take. And for good reason.

Making things or providing services to large numbers of people is a complicated business. You have to have a marketable idea, probably a brilliant one. You have to hire workers. You have to manage them. (You may even have to deal with a union, God forbid.) You need to build a spirit of cooperation and a culture that values high quality and customer service.

And don’t forget the R&D you'll need to keep the innovation flowing. Of course, you also have to compete in a crowded global marketplace, create an entirely new niche, or both. It’s the kind of work that keeps you up at all hours. The sweat in sweat equity is real. No way do you want to go near this game when you could run a hedge fund instead.

But surely this is a gross exaggeration, say the hedge fund cheerleaders -- a group of academics and journalists who consistently come to the defense of hedge funds. They argue that hedge funds make all that money because they are as important to our economy as Silicon Valley. That's quite a claim. In this chapter we examine in detail this potent defense of hedge fund prowess.

Do Hedge Funds Reduce and Absorb Risk? 

In terms every reader can understand, we take you through all the wonderful things that hedge funds are supposed to provide, starting with financial innovation and ending with how hedge funds supposedly absorb and reduce financial risk in our system. Here's an excerpt from my book that concludes this debate:

Unless you ’re Rip Van Winkle and slept through the Great Recession, you won't have any trouble seeing through a few more hedge fund apologias.

  • Hedge funds are supposed to “reduce the danger that economies will over-respond to shocks.” So, where were they when markets were collapsing? They were destabilizing Lehman Brothers, GM, AIG, and any other company risk managementthey could find to bet against
  • Hedge funds “reduce the chances that markets will rise to unsustainable levels in the first place.” But somehow they missed the biggest housing bubble in history?
  • Hedge funds “actually diminish the risk of the nightmare scenario.” Whoops.

In sum, industry cheerleaders can’t come near to answering our initial question: what value do hedge-fund elites create in exchange for their million an hour?

So the hunt must continue as we next explore how George Soros, the first hedge fund tycoon, made a billion dollars betting against the Bank of England. How did he do it? Who were the losers? Stay tuned for Step 3.

Step 1: How To Make A Million Dollars An Hour In Twelve Easy Steps

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