Lio Messi's salary is more deserved than those of hedge funds' managers
di Marco Liera - 15/01/2014
Inequalities are not all the same. Within the group of the planet's super-rich people who keep growing their own wealth - topic that I covered in another article last year - there are those who are dramatically flourishing and others who grow a little less, but in a fairer way.
In a heavily unbalanced world, in which the only standing rule is "the winner takes it all", the most evident bias applies to hedge fund managers. According to magazine Alpha's rankings, the 25 best-paid hedge fund managers in the US have increased their average annual salary from $133,7 million in 2002 to $537,2 million in 2012. In a decade, their earnings have quadruplicated (net of inflation, even though the cost of living does not really matter next to these figures...). According to Steven Kaplan and Joshua Rauh, from the University of Chicago, the total compensation of these 25 stars is four times the sum of the wages of the CEOs of the S&P500 companies.
Usually, hedge fund managers' earnings are partially linked to assets under management (charging a 1.5-2% commission rate) and to returns for the investors (20% of the absolute performance). On average, hedge funds - as illustrated in a Bloomerg-Businessweek cover story last year - fared worse than index funds in eight of the last ten years. In May, the average hedge fund returns lagged by 10% year-to-date the S&P500 index.
Could we say that inside a usually inefficient yet well-paid group there are super-men who constantly perform so outstandingly to deserve those exceptional earnings? Hard to say. What's for sure is that, even if there were such correct and long-standing performances, it would be crazy coming to the conclusion that these were entirely due to the managers skills (which deserves to be rewarded), rather than to mere luck. The matter is relevant, since where randomness is crucial (such as in asset management in financial markets), there is an issue of uncertain sustainability for any good outcome. To keep this in mind, hedge fund investors (wealthy private clients people or institutionals) should negotiate remuneration mechanisms like "share the gain, share the pain, in which at least incentive fees are given back by hedge fund managers to the funds themselves in case of subsequent underperformance. Why doesn't this happen? The matter should be further analysed. It could be that rich private people have cognitive deficits about the real managers' skills, and that institutional ones also suffer from agency-related problems: the board of a pension fund, not always equipped with the necessary knowledge, can choose well-known (and better-paid) hedge fund managers to minimise possible disputes with workers and pensioners. Not to mention the occurrence of illegal and untraceable paybacks, that also involve investment consultants hired for asset allocation and manager selection.
Truth is, those who earn the most are surrounded by curiosity towards them. Light should also be shed upon those hedge fund managers who close their businesses because of embarrassing performances. It is not uncommon that in a risk-taking based industry, someone could fare well and some others badly, but the latter are not necessarily forced to sell their mansions in Kensington, Chelsea or the Hamptons. What is certain is that they leave behind a legacy of deep losses to their clients. The "magic" of the industry lays in the asymmetry of the consequences of failure. The downside for the managers' wealth is limited. On the other hand, investors have no limit to their principal’s loss.
Sport stars salaries seem fairer if compared to the hedge fund managers figures. Their performances are related to their own rare talent. Lio Messi might get injured or play badly once, but in his life span as a footballer (10-15 years), his performances are much more sustainable. And if he suddenly were to get bad at playing for whatever reason, his salary, from the current 35 million (sponsorships included), would just equally plummet. If that happens, players are typically sold to another team, while sponsors end the on-going relationship. We could discuss about the morality of these incomes (an average of 18.4 million in 2013 were paid to the top 20 players in the world), but the "brand value" of a sports star, that is the expected surge in the sales of the goods and services promoted, is noticeable and can be estimated in part. Those who yearn for a return to the old payrolls ought to consider the fact that, back in the old days, the media coverage for these events was considerably smaller than what we have today. At the 1970 FIFA World Cup in Mexico, the qualified Italian journalists covering the matches were just 16! Sure, we should analyize the imbalances in value allocation created by the football system (a lot goes to the top players and their agents, not much to other players and clubs). Even though hedge funds’ returns for their clients can be measured in a more objective way than those of football players (in terms of "brand value"), phenomena of unjustified progression of those enormous profits are more common in the former than in the latter. Who, by the way, have shorter careers.
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