Proposal for New Hedge Fund Fee Structure
From Barry Ritholz and The Big Picture via Investingchannel is this piece on a Proposal for New Hedge Fund Fee Structure:
One of my pet peeves is the way that insiders — whether corporate CEOs, hedge fund managers, or elected politicos — capture compensation (or credit) for normal cyclical gains they had little or nothing to do with.
This is the approach favored by the Crony Capitalists –t hose people pretending to be free market participants, and who merely pretend to be creating value. They are taking credit for structural successes that would have occurred with or without them. What they are actually doing is capturing value, not creating it — and then transferring it from its true owners (shareholders/investors) to themselves…
What they are actually doing is capturing value, not creating it
And for this they are considered geniuses, and it is considered proof of their supremacy.
Other than the hedge fund and its customers, why is this anybody else’s business?
STR,
Because it’s everybody else labor that has created the value that is being captured.
So how do we re-re-redistribute gains through the entire economic chain?
Should a hedge fund manager who invests in 100 stocks redistribute profits through hundreds of thousands of workers? How?
If a college endowment invests in a hedge fund does the endowment owe returns to the workers in the 100 companies? How far do you go in controlling this?
Should the workers reimburse stock holders for the use of the capital assets?
Which bureaucrat do you want in charge of re-re-re-distribution?
Unions for one, taxation for the other. As you are aware, I’m a huge fan of the automatic transaction tax. Lastly, controls on the creation of “products” (what a funny application of the term) people think up as if they are thinking up a new game for gambling. Sorry, a new product for enhancing the market.
No need to jump to the conclusion that redistribution has to be by a means of government processing beyond taxing and spending.
Daniel, “Because it’s everybody else labor that has created the value that is being captured.”
First, my interpretation of Ritholtz comment is that he wants people – and he used the example of CEOs, HF managers and elected officials – to be compensated for alpha, i.e., value created above and beyond a baseline benchmark. Second, STR specifically referenced one category of the Ritholtz comment, HF managers.
Generally HF managers buy and sell financial securities. Those securities rise and fall for a whole host of reasons and HF managers are compensated, per Ritholtz, at 2 and 20. The “value of the labor” that you cite factors into the earnings and cash flows of the companies whose ownership is diffused into these financial securities. The earnings and cash flows are one reason those securities rise and fall in value, but they’re not the only reason.
So in a 2 and 20 model, I’ll ask to to expound on your initial response to STR’s question, because I don’t understand what one has to do with the other.
I wonder sometimes how people who can see the lack of value to society in adding nicotine to cigarettes cannot see the lack of value in financial “products” that produce nothing and can cause extreme harm.
The definition of “crony capitalist” is being perverted here:
“those people pretending to be free market participants, and who merely pretend to be creating value. They are taking credit for structural successes that would have occurred with or without them.”
I’ve never seen this definition of “crony capitalist.” It makes no sense. Crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of dirigisme.[1] Crony capitalism is believed to arise when political cronyism spills over into the business world; self-serving friendships and family ties between businessmen and the government influence the economy and society to the extent that it corrupts public-serving economic and political ideals. http://en.wikipedia.org/wiki/Crony_capitalism
A true example of a “crony capitalism” would be what Obama is involved in. Contribute to Obama = receive government loan. See Solyndra et al.
Sammy,
‘Cronny capitalism’ [as you define it] is really no more than one of many phenomena associated with a capital system arriving at a moment of inherent self-destruction.
A short clip then link to an article you will find of interest –
Fictitious Capital and Contracted Social Reproduction Today; China and
Permanent Revolution1
“Capital is the moving contradiction, (in) that it presses to reduce labor time to a minimum, while it posits labor time, on the other side, as the sole measure and source of wealth.”
Marx, Grundrisse2
This quote from the Grundrisse identifying the fundamental contradiction of the capitalist mode of production, succinctly describes the situation on a world scale today: once again, as in 1914, capital requires, in order to survive as capital, a vast devalorization of all existing values, however great the destruction of human beings and means of production which that entails.
This has in fact been the situation since ca. 1970/73. Global capital has put off the day of reckoning, a full- blown deflation, by a vast pyramiding of debt—fictitious capital—and by a series of “countervailing tendencies” which have supported that debt while contracting social reproduction.
http://bthp23.com/FictCapContrReprod.pdf
[Good solid history and Context]
Additionally since 1970-73 —
”Real global GDP growth averaged 4.9%a year in the Golden Age years from 1950 through 1973, but dropped to 3.4% annually in the unstable period between 1974 and1979. Dissatisfied with the instability, inflation, low profits and falling financial asset prices of the 1970s, advanced country elites pushed hard for a switch to a more business friendly political-economic system; global Neoliberalism was the result. World GDP growth averaged 3.3% a year in the early Neoliberal period of the 1980s, then slowed dramatically to 2.3% from 1990-99 as Neoliberalism strengthened, making the 1990s by far the slowest growth decade of the post war era.” (James Crotty)
As would be expected, the post-1973 annual growth rate of world real gross domestic investment fell substantially through 1996.
With the exception of parts of Asia, economic development throughout the world failed to gain traction, chronic excess capacity on one hand and credit fueled financial exuberance on the other.
Given the system’s inability to create employment so rapidly as required, a glut of labor and an expanding informal sectors as well. All the ‘better’ to intensify the international (and domestic) competition among workers, drive and hold wages down so also make consumer credit increasingly important to retention of living standards, no matter that this has been only another transfer to loan capital.
[Juan, July 2008, Naked Cap.]