New data on income inequality and finance

They confirm the central role of finance and in a piece I am writing for another outlet, I summarized some of the results as follows:

…for 2004, nonfinancial executives of publicly traded companies account for less than six percent of the top 0.01% income bracket.  In that same year, the top twenty-five hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500.  The number of Wall Street investors earning over $100 million a year was nine times higher than the public company executives earning that amount.

That is based on material from the Kaplan and Rauh paper in The Review of Financial Studies, 2010 (the final version is gated for many of you).  I had blogged an earlier version of this paper (which was itself excellent), but the final revision has additional numbers of interest, plus a much richer discussion.

On-line "pre-publication" is wonderful, but let's not neglect the improvements in the subsequent drafts brought in part by…on-line pre-publication.


I think we've had a war on real, productive capital. Whoever is doing it, STOP!

"the top twenty-five hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500": it's a wonderful eye-catcher whether or not it's fruit salad.

Are others haveing the same problem I am that 90% of the page is taken up with ads and when something is indented like this I can not read it?


To help reduce the incentive conflicts for fund managers most are required to put high percentages of their liquid net worth's into their own funds. As a result, the returns they earn are (in part) related to the risk they take with their own capital. I haven't looked at the paper in any depth so I can't tell you whether or not the authors try to separate out returns on their own invested capital from fee income for fund managers. But, in principle, most financey types do have their own skin in the game.

So, are those corresponding hedge funds getting their money's worth?

"The hedge fund investors earnings include a heavy portion of returns on their own risk capital."

Hedge fund managers are taxed at 15% for carried interest. The premise is that this is contingent income.

Well, I'm an attorney. Our firm occaisionally takes on contingent fee cases--just as risky as investing time in your hedge fund--but I don't get a 15% tax rate on the contingent recovery.

A rule for the rich, a rule for the poor. And, lawyers are not poor either, so it might be a rule for the hedge fund operators, and a rule for everyone else.

Typo above: the hedge fund should start with $10 to make the example numerically consistent.

I guess links don't show up in comments. The link for the paper is on the on my page on the Williams College econ web site.

David, the key is that people don't just wake up in the morning and decide to open hedge funds. It's usually the culmination of a career in investment management of 20 years or more. If you work your way up in a hedge fund management company to become a partner, a large portion of your pay has been siphoned into the fund for years. It's possible that you simply save your money for a long time and open your own fund as a spin-out or a pure start-up, but I can't imagine a situation where investors just hand their money over to Mortimer so he can invest it alongside his trust fund. You need an education, a track record, a well developed philosophy and strategy and a perfectly functioning organization to start a successful hedge fund.

If you want to get into flipping things around, I'm sure it's the case that the top 25 S&P 500 CEOs make more than 90% of all hedge fund managers. And maybe more importantly, the top 25 CEOs are more or less constant from year to year. The top hedge fund managers vary every year based on performance, with the possible exception of a few extraordinarily consistent ones like Ray Dalio. If I double or triple my fund in one year, I'm going to make more money than any CEO in that particular year, but that might represent the bulk of my income for the decade, or even for my career. And despite poor performance, not many S&P companies liquidated during the recent recession. One would expect the riskier career path to have higher peaks and lower troughs. The point is the attacks on the financial sector are often creative but rarely thoughtful in any meaningful way.

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