BlogS: Hedge fund manager made 31 times more in one hour than you did in all of 2007
Posted Apr 16th 2008 9:21AM by Peter Cohan Filed under: Other issues, Market matters, Scandals
The New York Times reports that the highest paid hedge fund manager, John Paulson, made $3.7 billion last year. If you are in the median family, that is 61,157 times more than your $60,500 income. Put another way, on a pretax basis Paulson made 30.6 times more in one hour -- $1.9 million -- than the median family took in all year. To make the list of the top 25 hedge fund managers you needed to earn $360 million last year. Thanks to them and a few others, income inequality in 2007 was at its most extreme since 1928, the year before the Great Depression began.
The top hedge fund managers made money in a variety of ways. They bet that prices of commodities like oil, wheat and copper would rise. But Paulson made his money by wagering enormous sums on a decline in the value of subprime mortgage-backed securities known as Collateralized Debt Obligations (CDO). One of his funds making that bet returned 590% in 2007, and the other handed back 353%. By the end of 2007, Paulson managed $28 billion in assets, up more than four-fold from $6 billion in 2006.
Many of the trends from which these hedge funds profit are coming out of your pocket. The higher commodity prices are squeezing the budgets of people who are paying more for food and energy -- for example, producer price inflation rose 1.1% in March. And hedge funds are among those driving up the prices that you pay for commodities through their leveraged bets. But, as I posted earlier, Paulson profited from the pain of homeowners who defaulted on their mortgages and foreclosed on their homes.
The median family probably lacks the funds to bet on the trends enriching these hedge fund managers. But if you have any spare cash, betting on rising commodity prices would be a good way to ease your pain. Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
Tags: featured, hedge funds, HedgeFunds, John paulson, JohnPaulson
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