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Take, Don’t Make!

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Posted on Apr 18, 2013
John Wiley and Sons

By Les Leopold

The following is an adapted excerpt from Les Leopold’s new book: “How to Make a Million Dollars an Hour: Why Hedge Funds Get Away with Siphoning off America’s Wealth” (John Wiley and Sons, 2013). It is reposted here with permission.

While researching, “How to Make a Million Dollars an Hour: Why Hedge Funds get away with siphoning off America’s Wealth” (John Wiley and Sons, 2013), I stumbled upon these stunning factoids:

• In 2009, David Tepper, the head of the Appaloosa hedge fund, earned an astounding $4 billion. Personally. (That’s $1,923,076.92 per hour.)
• The following year, John Paulson of Paulson and Co. broke Tepper’s record, hauling in $4.9 billion, or $2,355,769.34 per hour!
• Each firm reportedly earned around $20 billion.
• More amazing still is that they earned these enormous incomes during the two most horrific economic years since the Great Depression—and they did it with only a skeleton crew.

So, here’s the real puzzle: How did these two hedge funds, which have fewer than one hundred employees each, make as much money as Apple Inc., which relies on the hard work of its nearly thirty thousand U.S. employees (and the incredibly hard work of another seven hundred thousand workers and contractors globally)?

Hint: Produce nothing tangible for the real economy. Don’t waste your time inventing or manufacturing stuff. In the hedge-fund game, you don’t make—you take.

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And for good reason. Making things or providing services to large numbers of people is a complicated business. You have to have a marketable idea, probably a brilliant one. You have to hire workers. You have to manage them. (You may even have to deal with a union, God forbid.) You need to build a spirit of cooperation and a culture that values high quality and customer service. And don’t forget the R and D you’ll need to keep the innovation flowing. Of course, you also have to compete in a crowded global marketplace, create an entirely new niche, or both. It’s the kind of work that keeps you up at all hours. The sweat in sweat equity is real. No way do you want to go near this game when you could run a hedge fund instead.

Better to enter the mystical world of money managing, as described by Daniel A. Strachman, who has written several informative books on hedge funds. He believes that hedge-fund managers deserve to make so much with so little labor because they are simply more brilliant than those plebeians who worry about making cute little gadgets. Strachman is absolutely awed by hedge-fund billionaires:

“These individuals are some of the brightest investment managers of all time, possessing unique skill sets that have made them extremely successful at managing money and exploiting market opportunities…. In essence, they are capable of seeing the markets in ways that most of us simply cannot imagine, and it is this rare vision that allows them to determine whether opportunities have value, thereby creating infinite windows to make money. That is what makes them great hedge fund managers.” (Strachman 2008, 16)

I have no doubt that these hedge-fund guys are very bright fellows and that the ones who make it to the top possess intelligence, foresight, and obscure knowledge. But really, are these hedge-fund guys so much brighter than those who create and manufacture everything we use? Is their “rare vision” so superior to that of the late Steve Jobs and his associates? And just what are those “infinite windows” that “most of us simply cannot imagine”?

We all know how Apple earns its keep. It invents, manufactures, and markets products that the world voraciously consumes. (It also profits by using regimented workers in China who live in company dorms, wear identical company uniforms, get paid little, and work around the clock whenever Apple needs them.) The iMac, iPod, iTunes store, iPhone, and iPad have driven Apple’s net profit from $4.8 billion in 2008 to $8.2 billion in 2009, to $14 billion in 2010, and a stunning $26 billion in 2011.

Meanwhile, Tepper’s Appaloosa hedge fund probably took in $20 billion, racking up an incredible 117 percent return for its investors in 2009. Doing what, exactly? Where’s their iPad?

Here’s what the financial website HedgeFundBlogger.com says about how Tepper made his billions:

[Tepper] did so by betting that the recession would not last as long as many analysts and public officials predicted and taking big stakes in struggling firms like Bank of America and Citigroup. Tepper understood that the government would not nationalize these banks and when many were unsure of the two banks’ futures his fund was buying up shares which he believed were significantly underpriced. By purchasing these shares and stakes in other smaller banks and financial lending institutions, Appaloosa Management LP was able to turn a $6.5 billion profit in 2009.


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