The folks at the Business & Media Institute are out to challenge perceived bias in the media against free markets. To that end, Julia Seymour recently wrote about a segment on ABC's World News With Charles Gibson, in which Gibson and a correspondent, she said, "fanned flames of class warfare with a story about the high incomes of hedge fund managers." She asserted that the story left out the substantial taxes such managers pay and the profits they generated for investors.
You know, I agree. I didn't see the segment, but I've seen enough television coverage of various topics to know that stories like this rarely go into much depth. So let's take a closer look at Seymour's story. "According to Alpha magazine," she wrote, "the top 25 hedge fund managers earned a combined $14 billion last year. The top one, James Simons, made $1.7 billion by himself." I'm sure he did pay a hefty sum in taxes -- though I don't know how hefty. And he certainly has made many investors wealthier.
Who rewards from risk?
I don't find the world of hedge-fund management all that wart-free, though. Consider this tidbit, for example: Seymour notes that in the segment, one interviewee explains that since "hedge fund managers make huge bets on stocks and commodities," they deserve high returns for taking on such high risks. That sounds kind of kooky to me. I could take enormous risks by putting money into state lotteries, but would I then deserve high returns? I think not. There are rational risks and less rational risks.
Let's move on now to some details on pay and performance. If you qualify to invest in a typical hedge fund, you'll be charged a management fee of around 2%, which you'll pay each year regardless of how the fund fares. On top of that, the manager will take a chunk of any profits, too. That might seem reasonable, especially since it will serve to motivate him or her to do well. But does 20% seem reasonable? You think that's a bit steep? Well, how about 44% -- that's what Simons reportedly keeps. (And his annual fee is 5%, not 2%.) Still, following a year like 2006, when Simons reportedly delivered gains of 44% after fees, it's hard to quibble.
We can quibble about other hedge funds, though, because many of them perform far less spectacularly. At SeekingAlpha.com, Todd Stein and Steven McIntyre note, "In general, hedge funds are not good investments. Combine the steep fees with the fact that the overwhelming majority of fund managers underperform the market, and the odds are stacked against the investor right from the start."
Fortunately, there are much less expensive options around -- such as top-notch mutual funds. For example, the T. Rowe Price Media and Telecommunications (PRMTX) fund has made investments in companies like Google
Longtime Fool contributor Selena Maranjian owns shares of Amazon.com, which, along with Yahoo!, is a Stock Advisor recommendation. Try any one of our investing services free for 30 days. The Motley Fool is Fools writing for Fools .