Jordan fact of the day

The combined earnings of the world’s top 25 hedge fund managers of more than $14bn (£7.49bn) exceeded the national income of Jordan last year and three individuals took home more than $1bn, according to the biggest annual industry survey.

Here is the article, which illustrates the role of powerful capital markets in promoting income inequality.  Here is an NYT piece.

What we see are the fearless super-rich having the resources and the liquidity to bid away the equity price premium, plus grab extra profits on the side.  Why should they worry about risk?  The result is improved resource allocation.  The losers are future investors, who now, if they buy, pay higher prices.  That means people like me, wealthy enough to be buying equities but not fancy enough to do anything but buy and hold.  The investment question is whether the price run-up is mostly over, or whether it has just begun to take off.

Comments

Real wealth is capable people with the tools and infrastructure required to pursue happiness. The super-rich are really mental patients in a cozy assylum.

Could it be that the rate of return on capitol is increasing? In the future, we will all make such high returns on our equity.

Having read a few comments here I can not help but to wish for a repeat of Great Depression. Perhaps an experience of utter helplesness would put a little sense in all the hotheads here.
How shallow can humans be to throw financial jargon at each other believing all the while that they are better off then others thanks to their superior intellect. It is the nature of capitalism that someone HAS to be poor in order to keep the system ticking. Anyone who has read anything other than stock market gibberish can figure that out. To all those who think they are clever I suggest to try and make it (renouncing crutches of their western culture and governments) in some great democratic place such as Iraq, Haiti or Nicaragua (all great beneficiaries of US democracy).

You lose as a future investor, but win as a future consumer.

I'm more than happy to make that trade, since I enjoy working more than investing. That means while I'll never be super-rich, I'll be able to do more with my salary. Woohoo!

Where would a hedge fund manager but those fees that they earn? Not in a savings account. In facts most of the hedge fund managers tend to reinvest their fees back into their own fund. It's good for marketing to say you have most of your net worth invested along side your investors. Also being a hedge fund manager requires that you have a high degree of confidence in your own investment decision making process so it would seem to be the best place to put $1bn. So if there is a major market crash it is likely that a lot of fees earned would disappear.

I doubt the 25 hedge fund managers put together have an average return for their customers better than the S&P 500. Their business is a con. They hide the costs successfully and grow rich on others' losses. 'Twas ever thus.

The equity premium has been *huge* in the last 50 years. But there's still a long way to go before things get close to what current models predict.

That said, I'm not confident about the state of our knowledge and real understanding of the equity premium. I suspect that some thick tail analysis would go a long way toward explaining at least some of the premium.

To get an equity premium of around 1% (as the expected utility models predict), we'd need to see PEs in typical (not high growth) industries get to around 30-40 in today's interest rate climate. If this is really what's happeningm, and if the equity premium really "should be" around 1% -- it's *spectacular* news for today's long investors, who are going to make a killing riding this arb.

Even tomorrow's investors really don't have it that bad in this scenario. Purely passive[*] investors get hosed, but really all they are losing is the ability to collect exorbitant capital rents. The ability make fortunes by creating wealth gets *easier*, not harder. And as the return on passive capital gets smaller, the return to workers and to investors who add significant wealth creating knowledge should get bigger. Suppose I start a company -- after 5-10 years, I have profits of .5 million/year and no significant assets other than goodwill, and let's say this is no longer (or never was) a high-growth industry. Under the very old rules, I can sell out for around 2-4 million dollars (4-8x profits). Under the current market which much more private equity available, I may be able to get 5-10 million (10-20x profits). If the equity premium goes to 1%-ish and those kind of multiples are available across the board even to smaller companies, then I might get 15-20 million.

Of course, under this scenario, seed money and venture capital will become cheaper and cheaper and more and more available, which means there will be more and more competition for early stage investing. It will be interesting to see how it all shakes out.

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