The Irish Independent reports that Taoiseach Bertie Ahern was forced on to the defensive last night after he was caught out on two occasions in his last major interview before polling day.
Mr Ahern was left red-faced after he got his figures wrong on two crucial election issues on the final day of his three-week election campaign.
In the televised interview with RTE's Bryan Dobson, the same broadcaster who interviewed the Taoiseach about his personal finances last autumn at the height of the 'Bertiegate' controversy, Mr Ahern was forced onto the defensive when quizzed about health and tax cuts.
He firstly insisted that a dedicated facility for cystic fibrosis sufferers - which had been promised a decade ago - was provided for in the National Development Plan.
But when pressed on the subject, Mr Ahern, who attempted to change tack by referring to a €2.9bn fund, was forced to admit the allocation was not specified in the NDP. He then came under pressure to explain claims made in a Fianna Fail newspaper advert that Fine Gael's tax proposals would only benefit the top 3pc of taxpayers.
Mr Ahern acknowledged there were two million taxpayers who would benefit from Fine Gael's plans to cut the standard rate from 20pc to 19pc. He claimed the 3pc only referred to Fine Gael's non-abolition of the PRSI threshold. Mr Ahern insisted he still stood over the advertisement.
"We are saying that 97pc of taxpayers will gain more under the Fianna Fail proposals than the Fine Gael ones," he said.
The interview completed a bad final day of the election campaign for Fianna Fail.
There was also confusion among Mr Ahern's senior ministers as they attempted to explain the cost of the Government's plans to provide 1,000 public beds by building private hospitals on the grounds of public hospitals. Finance Minister Brian Cowen initially said the co-location plan would cost €70m a year over seven years.
His cabinet colleague, Social Welfare Minister Seamus Brennan then said it was "a difficult figure to pin down" when pressed on the issue.
Education Minister Mary Hanafin then put the figure at €40m a year over four years.
Eventually, as the confusion grew, Mr Cowen's special adviser, Colin Hunt, intervened in an attempt to put the record straight.
He said Mr Cowen had used the wrong gross figure (€70m instead of €57m) when he appeared on television.
The Taoiseach added to the confusion last night when he said the correct cost for co-location was €56m gross a year, and €40m net.
The Government was also dealt a further blow yesterday after it emerged that up to 1,000 health service workers are about to lose their jobs.
The cuts, details of which were revealed in a leaked internal Health Service Executive directive, will affect hospitals in Dublin, Cork and Galway, as well as ambulance services and hospices by the end of the year.
The Opposition last night sought to capitalise on what turned out to be a miserable last day of the campaign for Fianna Fail.
Fine Gael leader Enda Kenny claimed Mr Ahern's televised interview exposed "Fianna Fail's falsehoods, misrepresentations and their campaign to frighten the electorate".
He added: "Tonight the Taoiseach was forced to acknowledge that Fine Gael's tax proposals do indeed benefit 100pc of Ireland's taxpayers. He was also forced to admit that his Minister for Finance had got his sums badly wrong about the cost of the FF/PD Hospital colocation programme.
"He also appears to have misled the people on how cystic fibrosis is being supported, as the funds he suggested were available to them weren't specified in the National Development Plan."
Labour leader Pat Rabbitte attacked Fianna Fail's proposal to give private developers tax breaks for building private hospitals on public land.
"We'd build two-thirds of our hospital beds with the money Fianna Fail want to hand over to their friends in the Galway (Races) tent," he told the Irish Independent.
During the interview on RTE's Six-One news, Mr Ahern also came under pressure when questioned about his revelations concerning his personal finances.
But he said he was "confident" nothing would come out of the Mahon Tribunal hearings which would destabilise an incoming Government which he headed.
The tribunal resumes its hearings next Monday - just four days after the general election.
"Everything I gave the Mahon Tribunal was merrily leaked 48 hours after it circulated the documents to a limited number of people.
"So it is all there in the public domain. It is even on websites in America and Australia," he said.
The Irish Independent also reports that house prices have to come down to make them affordable for buyers again, and cuts in stamp duty will not help, according to an expert at a leading estate agents.
While estate agents are usually accused of 'talking up' house prices, Derek Brawn, economist at Savills HOK, said it would not really matter if prices fell 10pc over the next two years, so as to let middle-income buyers back into the market.
When inflation is added, such a fall might amount to a 20pc drop in real terms. "But they went up so much over the last decade, does it really matter?" said Mr Brawn.
"The cushion of equity in property is still huge at €430bn and the fall in real prices will close the gap in affordability."
Savills HOK operates the Hamilton Osborne King estate agents. Mr Brawn said there were signs that ordinary sellers were beginning to reduce their prices, but builders were still reluctant to do so on new properties.
"We are just telling the facts as we see them. There is no point in talking things up for the sake of it. The rapid rise in interest rates has put a huge dent in affordability and everyone has to adjust to that reality."
He said a middle-income couple taking home €5,000 a month could have serviced a €350,000 mortgage two years ago, but could now borrow only €280,000. "Prices for their kind of house have gone up €80,000 since then, so the loss of affordability is €150,000!"
Mr Brawn said cuts in stamp duty as proposed in election manifestos could not close such a huge gap without a fall in house prices. "Most first-time buyers don't pay stamp duty. Cuts for people are not materially significant compared with rising rates. They might even put more pressure on the price of new houses."
He said builders had tried marketing and special offers to sell new houses at existing prices, but without success. "They have made so much money they can afford to wait, but the penny will drop in the second half of the year and they will realise they are not going to get those prices.
"Interest rates have gone up seven times, and are expected to go up once more by the end of the year.
"They are likely to stay at those levels for a couple of years and that is the reality everyone must face."
He expects a rapid fall in the number of new houses being built. "We are predicting 75,000 completions this year, down from 90,000 last year, and falling to 65,000 next year and 55,000 in 2009. That is still a large number and would be enough to meet demand."
The Irish Times reports that listed bookmaker Paddy Power yesterday predicted that operating profits for 2007 will hit €58 million. In a statement issued at its annual general meeting (agm) in Dublin, chairman Fintan Drury said it had benefited from favourable sporting results over the first 20 weeks of the year.
"The group now expects operating profit of approximately €58 million in 2007, assuming those sporting results are not offset by an unfavourable run over the remainder of the year, and continued turnover growth in line with our expectations," he said. "This result would represent underlying operating profit growth compared to 2006 of approximately 27 per cent or 8 per cent above the current consensus market forecast."
The favourable trading for Paddy Power means its customers are losing more money than expected. Mr Drury said this had resulted in a slowdown in turnover growth during the 20 weeks to May 15th. However, he said that gross win, the difference between the amount staked and the amount returned on winning bets, was ahead of expectations.
Shareholders approved a motion tabled at the agm that will allow Paddy Power to buy back up to 10 per cent of its stock. The group proposes to buy back the stock as a way of returning cash to shareholders. It revealed details of its plan when it announced its 2006 results in March.
At the end of last year, Paddy Power had €87.1 million in cash. It has been criticised in the past for holding on to cash and not returning it to shareholders, although the company has always maintained that it needed these resources to fund development and expansion.
In March, chief executive Patrick Kennedy said the board believed it had enough money to fund expansion and to return some cash to shareholders. It will announce the scale and timing of any buy back it is proposing to carry out in 2007 later this year.
The group is gearing up to launch a new spread-betting service that will focus on equities, commodities and indices.
Paddy Power recently signed an estimated €1 million a year deal with Turf TV for live coverage of racing from a number of leading British race tracks. The courses have broken away from the existing Satellite Information Systems (SIS) service that has been supplying betting shops with live pictures and data since the 1980s.
Many of its competitors, including UK chains, Ladbrokes and William Hills, are blacking the service on the grounds that it will result in extra costs.
Mr Kennedy said yesterday that it was too soon to say if the move was having an impact on turnover.
The Irish Times also reports that Irish consumers will shortly be able to shop around in Europe for the best credit deals following agreement within the EU on changes to the €800 billion loans market.
The decision by EU consumer affairs ministers to introduce a directive on consumer credit loans will intensify competition among lenders while making it easier for consumers to get the best value in credit cards, car loans, purchase finance and other loans, excluding mortgages.
The aim is to create a single market in the EU for credit loans to replace the current fragmented system. At present, only 1 per cent of loans are obtained from outside the borrower's home state.
While the Irish are among Europe's biggest borrowers, for the moment at least, there may be little incentive for consumers here to seek out lenders abroad. At 6.8 per cent, the cost of credit in Ireland is among the lowest in the EU, where rates vary between 6 per cent (in Finland) and 12 per cent (in Portugal).
The main effect of the new rules will be to provide standard, comparable information to customers across the EU who are taking out a credit loan. An EU-wide European credit information form will be created to give consumers information on interest rates, number and frequency of payments, charges for defaulting, and so on. There will also be a single EU-wide method for calculating the APR (annual percentage rate of change) so consumers can see the true cost of credit.
The proposed directive also provides consumers with a two-week period after concluding a credit contract during which they may withdraw without having to give any reason or incur any charge. Another provision confirms their right to repay a debt early at any time. Creditors will be able to claim compensation in such cases, but will have to conform to EU-wide standards.
EU consumer affairs commissioner Meglena Kuneva said: "At the moment trying to compare different credit offers across the European market is like trying to compare apples and pears.Standard, comparable information for all EU credit loans will make the market more transparent for business and consumers."
The proposals must be approved by the European Parliament before they take effect
The Irish Examiner reports that developer Glenkerrin Homes will have to pay €2.56 million in stamp duty to the Revenue Commissioners arising from its purchase of lands in Palmerstown, Co Dublin, following a High Court decision in favour of the Revenue yesterday.
In a case which rested on the proper construction of the Stamp Duties Consolidation Act 1999, Ms Justice Mary Laffoy ruled that an appeal commissioner had wrongly decided the amount of stamp duty due on transfer of the lands was €284,400.
A proper construction of Section 40.2 of the 1999 Act meant Glenkerrin must pay €2.56m stamp duty or 9% of the entire price, less a 10% deposit of €3.16m paid for the lands. The appeal commissioner had wrongly decided that the amount due was 9% of the deposit price of €3.16 million, she held.
The case arose from an April 2004 contract for sale of lands and premises at St Loman’s Hospital, Palmerstown, Dublin between the Eastern Regional Health Authority and Glenkerrin under which Glenkerrin agreed to purchase the lands for €31.6m. Under the contract, a deposit of €3.16m was payable.
The Revenue originally assessed stamp duty due as €2.84m, being 9% of the total purchase price. Glenkerrin argued the chargeable consideration was limited to 9% of the deposit of €3.16m.
The appeal commissioner upheld Glenkerrin’s claim that the security given for the remainder was a non-marketable security under section 40.2 of the 1999 act and that no amount was “due” on security on the date of the transfer within the meaning the act.
Ms Justice Laffoy yesterday ruled that, as a matter of common and commercial sense, the type of non-marketable security envisaged was one which secured future payments of principal and interest.
The legislature must have intended the amount due would include all sums, whether for principal or interest, in respect of which there was a legal liability on the material date, even though such sums were payable in the future.
In this case, the amount due for principal and interest, on the security given by the undertaking and guarantee, was €28.44m and 9% of that was due in stamp duty.
The judge added she was not influenced in her decision by an amendment to the Finance Act of March 2005. It was reasonable to infer that amendment was influenced by the appeal commissioner’s finding, she added.
The Financial Times reports that Jean-Claude Trichet, European Central Bank president, urged union leaders on Tuesday to show “a high level of responsibility” in their pay claims, amid fears that the economic recovery could feed through into higher wage settlements.
Mr Trichet told union leaders that “mass unemployment” in Europe could be tackled if those in work showed pay restraint and helped to boost the continent’s competitiveness.
The ECB president was facing a critical audience of Europe’s union bosses, some of whom believe the bank is excessively focused on slaying a non-existent dragon: inflationary pay rises.
The European Trade Union Confederation, holding its four-yearly congress in Seville, heard calls for workers to gain a greater share of the fruits of the economic recovery, reflecting their growing productivity. Mr Trichet agreed that the issue should be debated.
Collectively bargained pay rises in the euro area have remained stable at 2-3 per cent for a decade, barely keeping pace with inflation. Unions believe the ECB’s policies, including calls for pay restraint, are holding back domestic demand.
They also blame the bank’s interest rate policy for pushing up the eurozone exchange rate, hitting exports, and argue that rates should go no higher than 4 per cent.
Mr Trichet was accused by Jürgen Peters, head of Germany’s powerful IG Metall union, of being prepared to hold only a “one-way dialogue” with the unions.
But Mr Trichet insisted that “social partners” – the unions and employers – had a duty to unemployed workers to help the bank keep inflation in check, arguing a link between economic stability and job creation.
He refused to comment on recent pay rises in Germany, including a 3.5 per cent increase for construction workers, but the ECB has repeatedly said it was watching developments closely.
Though higher than recent settlements, the pay-rise German business agreed with unions this month for the 3.4m workers in the engineering sector came slightly below what economists had expected.
Mr Trichet said responsible pay claims benefited the unemployed and were essential to maintain competitiveness in some countries and industrial sectors. “Particular wage agreements should take into account price competitive positions, the still high levels of unemployment in many countries and productivity developments across sectors.”
The FT also reports that the popularity of early retirement appears to be waning as more people opt to work on into their 70s.
HSBC, the UK-based banking group, on Tuesday released a report entitled the “Future of Retirement”, that was the result of questioning 21,000 people in 21 countries, the largest study of its kind.
The bank found that 11 per cent of people in their 70s and a third of those in their 60s are still in some kind of paid employment. The figure is even higher in some places like the US, where 19 per cent of those in their 70s are still working.
Early retirement schemes were introduced by companies in the 1970s and 1980s as a response to mass youth unemployment, with the intention of making room in companies for younger workers. Sarah Harper, of the Oxford Institute of Ageing, which wrote the report for HSBC, said there was evidence that some people are beginning to reject early retirement as an option.
“Early retirement has since become an embedded part of the culture and of people’s expectations. But there is also evidence that many who retired early have regretted it,” she said.
The study found that only 12 per cent of people in their 40s and 50s expect to take early retirement. This compares with 16 per cent of those in their 60s and 70s questioned in the report who had actually taken early retirement. Only in Germany, South Korea and Hong Kong did a higher proportion of people expect to retire earlier than had been the case in the past.
Clive Bannister, group managing director of insurance for HSBC, said that people in their 60s and 70s were often fitter and healthier than had been the case in the past, meaning they could work longer if they desired. The report calculates people aged over 60 pay £39.7bn ($78.4bn, €58.3bn) in taxes from paid employment. No comparable figures for earlier years were given.
Mr Bannister said: “In terms of health the age of 70 is the new 50. The report found retirement is as good or better than people’s expectations and advances in healthcare have sustained this.”
Those questioned in the study aged between 60 and 79 years old who described themselves as being in fair, good or very good health was 86 per cent, compared with 14 per cent who believed they suffered poor or very poor health.
The highest proportions of healthy people in their 70s were in Canada with 76 per cent, the UK with 73 per cent and the US with 72 per cent.
But even those in their 70s questioned in Latin America and Asia reported low levels of poor health.
The study also found older people did unpaid voluntary work worth billions of pounds a year and also contributed as carers for relatives.
“People in their 60s and 70s are vital to our society and if they disappeared from that, families and communities and to a certain degree workplaces would fall apart,” said Prof Harper.
The New York Times reports that when GlaxoSmithKline settled a lawsuit three years ago with the State of New York over the antidepressant medication Paxil, the company agreed to take an unusual step: publicly disclosing the results of its clinical trials for Paxil and other drugs.
The company, which was criticized at the time for failing to publicize all pediatric trials of Paxil, not just the positive ones, made good on its promise. The first posting on a new Web site was about 65 studies involving its popular diabetes drug, Avandia.
This week, GlaxoSmithKline learned what that greater disclosure could mean.
A cardiologist at the Cleveland Clinic, Dr. Steven Nissen, stumbled onto the Glaxo Web site while researching Avandia last April. He and a colleague quickly analyzed the data, and on Monday, The New England Journal of Medicine released its finding that Avandia posed a heightened cardiac risk.
“It was a treasure trove,” Dr. Nissen said about the Web site.
GlaxoSmithKline has disputed the journal’s interpretation. Officials with the Food and Drug Administration said they were reviewing whether to take any action on Avandia.
Whatever the drug’s fate, the episode is likely to fuel efforts by some medical experts, including Dr. Nissen, to persuade lawmakers to require makers of drugs and medical devices to disclose study results publicly. Currently, producers are not required to do so, but Congress is considering legislating a requirement.
Many companies besides GlaxoSmithKline already post results from some studies or trials on their Web sites, or one operated by the Pharmaceutical Research and Manufacturers Association, a trade group in Washington.
Dr. Bruce M. Psaty, a cardiologist at the University of Washington, said that having such information can play a critical role, as the case of Avandia suggests, in spotting signals of a drug’s possible dangers.
Other experts have argued that the relative efficacy or cost of competing drugs can be compared only when all study results, rather simply those that a company chooses to publicize, are available.
Studies have found that the vast majority of drug and medical device studies are never published in medical journals.
“The more information, the better,” Dr. Psaty said.
Dr. Ronald L. Krall, chief medical officer for Glaxo, said his company sharply disputed the methodology of Dr. Nissen’s study, and a top F.D.A. official said that the agency had previously informed doctors about Avandia’s heart risks.
Dr. Krall said his company was aware when it created its database of study results a few years ago that it might lead to controversy. Other scientists might look at its data or choose to analyze it differently than company officials did, he said.
“We are committed to the principle of transparency,” Dr. Krall added. “But we knew that when starting this, by putting the data in the public, many things could happen, some of which could be trouble.”
Some experts also believe that releasing the results of hundreds of studies involving drugs or medical devices might create confusion and anxiety for patients who are typically not well prepared to understand the studies or to put them in context.
“I would be very concerned about wholesale posting of thousands of clinical trials leading to mass confusion,” said Dr. Steven Galson, the director for the Center for Drug Evaluation and Research at the F.D.A.
Roughly a decade ago, some experts raised concerns that doctors were not getting the full picture about a drug’s risks and benefits because they tended to hear or read about only those trials in which the medication showed a benefit.
Companies and researchers typically did not seek publication of studies that showed that a drug had little benefit or might even cause harm. In some cases, trials that were started and stopped before completion were not disclosed.
As a result, outside researchers could not learn what trials of a drug had been performed so they could put findings in context or compare studies of competing drugs.
That issue caught the public’s attention after it was disclosed that Glaxo had not publicized trials of Paxil in children in which the drug showed little, if any, benefit. The company was subsequently sued by Eliot Spitzer, who was then the attorney general and who is now the governor of New York. The drug maker, as part of the lawsuit’s settlement, created a public Web site for trial results. Glaxo was by no means the only drug company that came under scrutiny. In late 2004, a group of leading medical journals, including The New England Journal of Medicine, said that they would no longer publish articles about study results unless producers publicly registered the tests on Web sites like ClinicalTrials.gov, which is run by the National Library of Medicine.
As a result, the number of drug trials registered on that site has sharply increased, said Dr. Deborah Zarin, its director. (Currently, drug manufacturers are required to register trials of new drugs for serious or life-threatening conditions).
But even before the recent Avandia episode, advocates for greater study transparency like Dr. Nissen were pushing lawmakers to take the next step by requiring that producers of drugs and makers of devices not only register trials but also publicly disclose study findings.
“It is critical, but this raises the question of how many other drug safety issues are out there,” Dr. Nissen said. Recently, the Senate passed an F.D.A.-related bill that would set up a process for developing a mechanism that experts expect would result in a government-run database where companies and others would post the results of clinical trials. The House is currently considering a bill that has somewhat different provisions.
Dr. Alan Goldhammer, a senior executive at the Pharmaceutical Research and Manufacturers Association, said the organization supported the disclosure provision in the Senate bill that had passed.
He said the group, however, was concerned that some states may be trying to get ahead of the federal government on the issue; for instance, Maine recently passed a bill that mandates the release of study findings.
“We want to make sure it is done in a reasonable way,” Dr. Goldhammer said.
Recently, a report issued by the Institute of Medicine, a part of the National Academy of Sciences, recommended that the F.D.A. release all summaries of study data it had collected in the process of approving new drugs as well as all post-marketing studies of those products.
The F.D.A. rejected the first recommendation as overly burdensome and Dr. Galson, the director of the F.D.A.’s drug evaluation and research, said that the agency already released much of this information. “It is not that we are philosophically opposed to it, but the work would be enormous,” he said.
Even those supporting mandatory results disclosure acknowledge that finding uniform ways to disclose complex scientific information would prove difficult and time-consuming. For example, Dr. Zarin of ClinicalTrials.gov said that reviewing a study’s results to make sure that it was free of any biases interjected by researchers involved in a study or by its sponsor was a major undertaking.
Then, there is also the question of who the audience for such information should be — scientists, consumers or both?
Dr. Zarin said that there had been significant discussion among experts over the last year about that issue. Most have agreed that data is best understood by experts, a view that might not prove popular with patients.
Dr. Krall of Glaxo agreed, saying the drug maker had considered providing summaries of its studies for patients, but then dropped the efforts after deciding it would require making subjective decisions about trial results.
“There is not a uniform view about how to interpret results,” he said. “It is quite problematic to go that next step.”
David Leonhardt writes in the NYT also reports that when Institutional Investor’s Alpha magazine released its annual list of the highest paid hedge fund managers last month, it allowed the rest of us to play an entertaining little parlor game: what could you buy if you made as much money as those guys?
James Simons, a 69-year-old mathematician who was at the top of the list, earned $1.7 billion, which equaled the amount of money that the federal government spent last year running its vast network of national parks. Down at No. 3 on the list, Edward S. Lampert of Greenwich, Conn., the investor who owns a large chunk of Sears, made $1.3 billion, which, if you forget about taxes, would have allowed him to buy the entire economic output of Sierra Leone. We’re talking about real money here.
Today, Alpha magazine will release another big list, and this one offers a chance to answer another, arguably more important, question: Are these billionaire hedge fund managers really worth it?
Leonhardt says that the reason hedge funds are a license to print money is their fee structure. A typical fund charges a 2 percent management fee, which means that it keeps 2 cents of every dollar that it manages, regardless of performance. Mutual funds, on average, charge about 1 percent.
On top of the management fee, hedge funds also take a big cut — usually at least 20 percent — of any profits that exceed a predetermined benchmark.
So in a good year, a fund’s managers bring in stunning amounts of money, and in a bad year, they still do very well. Some quick math shows why: 2 percent of a $5 billion portfolio, which was roughly the cutoff for making Alpha’s list of the 100 largest funds, equals $100 million. A fund’s managers get to take that fee every single year.
Last year was actually a pretty tough year for the industry. Because hedge funds tend to make a lot of countercyclical bets — thus the name — they can often turn a profit even when the stock market falls. When it’s rising broadly, though, many struggle to keep up. Last year, the Standard & Poor’s 500-stock index jumped 14 percent, while the average hedge fund returned less than 13 percent, after investment fees, according to Hedge Fund Research in Chicago.
But the men — and they are all men — who appear on Alpha’s list of top earners don’t manage average hedge funds. They manage the biggest funds in the world, the ones that are winning the Darwinian competition for capital, and many of them aren’t having any trouble beating the market. One of the funds at Mr. Simons’s firm, Renaissance Technologies, delivered a net return of 21 percent last year. The other returned 44 percent after fees. And Mr. Simons, who relies on a fantastically complex set of algorithms, doesn’t charge “2 and 20” — as the typical industry fees are called. He charges “5 and 44” — a 5 percent management fee and 44 percent of profits — yet he has still been doing very well by his investors for almost two decades.
Leonhardt says that he realizes that a lot of people find 9- and 10-figure incomes to be inherently excessive. Or even immoral. From a strictly economic point of view, however, they are also perfectly rational. You cannot find anyone else who is providing the same returns as the best hedge fund managers at a lower price. If you don’t like it, you don’t have to give them your money.
(Even if you do like it, they probably won’t take your money. In exchange for being lightly regulated, hedge funds are open only to wealthy investors and big institutions.)
Thanks to their incredible performance, the biggest funds have grown far bigger in recent years. The 100 largest firms in the world managed $1 trillion at the end of last year, or 69 percent of all the assets in hedge funds, according to Alpha. At the end of 2003, the top 100 had less than $500 billion, or only 54 percent of total hedge fund investments.
“The best performance is coming from the largest funds,” said Christy Wood, who oversees equities investments for the California Public Employees’ Retirement System, which, like a lot of pension funds, is moving more money into hedge funds.
But there is an irony to this influx of money. It all but guarantees that hedge fund pay over the next few years won’t be as closely tied to performance as it has been. The hundreds of millions of dollars that have flowed into hedge funds have made it all the harder for fund managers to find truly undervalued investments. The world is awash in capital.
All that capital, of course, also translates into ever-greater management fees, regardless of a fund’s performance. The flagship hedge fund at Goldman Sachs lost 6 percent last year, but it still brought in a nice stream of fees. Bridgewater Associates, which is based in Greenwich, has earned a net return of less than 4 percent in each of the last two years. Yet its founder, Raymond T. Dalio, made $350 million in 2006.
“When we have a bad year, we’re essentially flat,” Parag Shah, a Bridgewater executive, told me. “And when we have a good year, we have a great year.”
Goldman and Bridgewater may well bounce back, but the combination of extraordinary pay and ordinary performance is going to occur more and more in the coming years.
Outside of the highfliers on the Alpha list, it’s already the norm. Since 2000, the average hedge fund hasn’t done any better, after fees, than the market as a whole, according to research by David A. Hsieh, a finance professor at Duke. Still, even mediocre managers, after a lucky year or two, are able to attract gobs of capital and charge “2 and 20.”
So are today’s hedge fund managers really worth it? Sure, but only if they deliver the sort of performance that Mr. Simons has, and very few will in the years ahead. More to the point, it’s extremely difficult to know who the stars will be.
In all sorts of walks of life, people tend to think that the past is a better predictor of the future than it really is. That’s why journeyman baseball players — a Yankees pitcher named Carl Pavano comes to mind — are able to sign huge contracts based on a single good season. It’s also why so many investors chase returns.
The genius of the world’s hedge fund managers isn’t only in how they invest their money. It also lies in having set up an industry that takes advantage of a timeless human trait.
