Hedge Fund Managers Make a Lot. But Too Much?

A new study out on Wednesday from the Institute for Policy Studies has shed light on several shocking statistics that underpin the latest cause célèbre in the world of finance: Hedge fund managers make a way, way more money than you do.

"Executive Excess 2007: The Staggering Social Cost of U.S. Business Leadership," takes aim at compensation norms for executives of all stripes, but comes down particularly harshly on private equity and hedge fund managers. To wit:

Top private-equity and hedge fund managers made more in 10 minutes than average U.S. workers earned all year.

Put another way, the 20 highest-paid fund managers made an average of 22,255 times the U.S. average annual salary.

The factoids are intended to be incendiary, and have been successful in attracting their share of attention. But somehow, I have a hard time getting worked up how much better off I might be if fund managers got rational paychecks.

Outcry over the nation's wealth gap is hardly a novelty. But before hedge funds started booming and it was fund managers with targets on their backs, C.E.O.'s took most of the heat for swollen compensation packages.

(Chief execs at large U.S. corporations make about 365 times the pay of average workers.)

The C.E.O. vs. worker comparison makes a lot of sense. It's easy to draw the line from a high salary for one exec to lower ones for employees, and to see how the c-suite takes money from the pockets of the little guy.

But super-sized bonuses for fund managers have a much less direct relationship with your average Joe's paycheck. All of the cash brought home by hedge fund management is skimmed off the pools of assets under management, plus a sizable chunk of the returns. There are no "little guys" in that scenario left splitting up a smaller pie.

The Institute for Policy Studies and others point to missed tax opportunities and the role of such salaries in driving up C.E.O. compensation as two particularly negative consequences of excessive pay.

But hedge fund apologists say that raising taxes would do the economy more harm than good because it would reduce investment, lower returns for investors, and make markets less competitive.

Others, such as a law professor at the University of Pennsylvania, assert that re-writing tax law wouldn't be successful in raising revenue, as funds would merely restructure to avoid the tax laws.

Regardless of where you stand on the issue, it's fair to say that the impact of hedge fund bonuses on the economy is indirect, and less black and white than C.E.O. pay.

Do I wish I earned the average $657.5 million that the top 20 hedge fund managers raked in during 2006? Absolutely.

But do I think I might come closer to earning that by cutting their salaries in half? Not convinced.

by Liz Gunnison