What do you do when everyone is screaming that you’re overpaid? You tell them that the guy next to you is more overpaid. That’s Paul Singer’s strategy at least.
The hedge fund billionaire spent his latest investor newsletter attacking the pay structure of Wall Street, telling his clients that big banks are essentially highly-leveraged hedge funds. He then did a little comparing and contrasting, though he was quick to remind investors that “it didn’t take much time.” Elliott Management is still pounding the pavement, hammering away at Excel spreadsheets.
Whoever was in charge of the pet project looked at the five largest U.S. investment banks, assumedly J.P. Morgan, Morgan Stanley, Goldman Sachs, Bank of America and Citigroup, and found that their combined compensation expenses were 64% of gross adjusted pretax income.
At hedge funds, employee compensation costs accounted for just 23% of gross adjusted returns, they found. When looking at market cap and tangible book value for big banks and total capital for hedge funds, the discrepancy in pay was more than six fold.
“By every measure, employee compensation at major financial institutions is significantly higher than that at hedge funds,” Singer wrote.
He then told people who are complaining about hedge fund pay to shove it. Kind of. It was a little nicer than that. “At the very least, it calls into question the rationale of investors who comfortably own significant positions in major financial institutions but confine their criticisms of complexity and compensation to hedge funds,” Singer wrote.
Fair enough. But let’s put forward two points of contention. One, calling banks “highly-leveraged hedge funds” is kind of a stretch, particularly in 2015 with prop trading and capital requirements severely limiting what banks can do with their assets. And, perhaps more importantly, people aren’t complaining as much about hedge fund pay as they are hedge fund performance. Beat an index fund for a full year (rather than losing six straight times) and you can write as big a bonus check as you want.
For the record, Elliott Management has outperformed many other hedge funds, returning north of 8% last year. He was just out protecting his compatriots.
The investor letter was first reported by Business Insider.
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