ARCHIVES: THE KINGDOM OF HEDGISTAN

Because they have so much operating leverage (they can make gazillions of dollars) and their business models are scalable (managing $500 million or $3 billion takes the same amount of space), hedge-fund managers simply don’t care how much it costs to rent office space or buy homes in their favored locales. No tax breaks or sweetheart real-estate deals could establish a hedge-fund center in, say, Oklahoma. To understand Hedgistan, you have to forget the laws of economics and turn instead to the laws of physics. Less Milton Friedman, more Isaac Newton.
___________________ 

PREFACE (HUFFINGTON POST): 

We heard a lot about CEO pay when Wall Street firms doled out their annual bonuses earlier this year. Of course, any bonus at all could be interpreted as excessive after the massive taxpayer-funded bailouts that rescued the big banks from failure. But Goldman Sachs CEO Lloyd Blankfein’s $9 million 2009 bonus and JPMorgan CEO Jamie Dimon‘s $17 million bonus pale in comparison to the top hedge fund managers’ paychecks.

According to a ranking by AR: Absolute Return+Alpha magazine, the top 25 best-paid hedge fund managers made $25.3 billion in 2009 — over $1 billion each on average. (The lowest-paid on the list earned $350 million, but seven of them actually brought home more than a billion dollars.) And you’ve likely never heard of.the manager who made the most — $4 billion — this year.

Among the top five:

 

 

 

 

 

 

 

 

 

New hedge funds are formed when the prospect of superior compensation pulls employees of large investment banks and existing hedge funds away from the mother ship to set up their own trading outfits. But this outward force is balanced by a centripetal force. The gravity of the larger mass makes it difficult to build successful funds outside the orbit of Greater Hedgistan. New hedge funds require face-to-face access to specialized services—flacks, fund-raising consultants, lawyers, accountants—as well as to the institutions and individuals that supply capital.

The first law of hedge-fund dynamics is that most people who start hedge funds don’t wander far from familiar turf.  This is partly because traders are loath to give up hard-won co-ops and nursery-school spots, and partly because they are superstitious creatures of habit. Says one fund manager who set up shop three blocks away from his former employer, “Instead of walking out the east door of Grand Central, I now walk out the north door. And I still take the 4:18 home on Fridays.”

The second law of hedge-fund dynamics—also known as the narcissism of small distances—is that hedge-fund managers seek the shortest possible commute that doesn’t involve working at home. The concentration of hedge funds in both the Upper East Side and Greenwich is driven in large measure by the desire of managers and traders to live in those places. In fact, the hedge-fund industry got started in Greenwich when a few hotshots decided they no longer needed to deal with the grief of a 35-minute commute. There’s no functional difference between operating a fund there or in Manhattan. The funds draw upon the same labor force and maintain the same business model. Company executives visiting investment firms in Manhattan routinely swing through Greenwich. Even the taxes are similar: The two counties with the highest federal income tax as a percentage of adjusted gross income are New York, with 20 percent, and Fairfield, Connecticut, with 19.4 percent. (Connecticut does have a lower state income tax: 5 percent, compared with New York’s 6.85 percent for the top bracket.) “The guy who lives on Fifth Avenue and works at 9 West 57th Street is really doing the same thing as the guy who lives on Conyers Farm Drive and works in Greenwich,” says Brett Fromson, a fund-of-funds manager in New York. Teterboro vs. White Plains. Zabar’s vs. Whole Foods. Tiffany on Fifth Avenue vs. Tiffany on Greenwich Avenue.

The third law of hedge-fund dynamics dictates that hedge-fund managers, like other members of the global plutocracy, tend to move in the same small, concentric circles. “They’re generally image-conscious, they like to congregate, and credibility is generated by affiliation and by proximity,” says Dean Shapiro, executive managing director at CB Richard Ellis, who has hedge-fund clients in both Greenwich and New York. And here we leave physics for psychology. What’s the point of having alpha money—and all the things it can buy—if nobody can see it?