Portfolio Magazine has been following the financial swanfall with some salient reporting. One of the best is the blog of Felix Salmon. He has at least 3-4 very interesting posts per day. Take this one on how the Hedge Fund Model has broken down:
It’s becoming increasingly clear that the standard hedge fund incentive model breaks when a fund plunges in value.
If the value of a hedge fund is rising, then 2-and-20 works as intended: the fund manager gets paid more the more that the value of the fund goes up. And if the value of the fund falls a little, then the high-water-mark system stops the fund manager from being paid twice for getting to the same spot. But if the value of the fund falls a lot, then suddenly the fund manager loses pretty much all of his incentives, things start going rather pear-shaped, and there’s a good chance that fund investors will end up getting shafted by their fund manager….
And there’s no shortage of fund managers with underperforming funds who have announced that they’re going to set up new funds: both John Meriwether and Michael Zimmerman are in the news today planning to do just that, following the lead of Jeffrey Gendell.
In all these cases, investors in the old flagship funds end up getting either liquidated or ignored, while the fund manager concentrates on the new fund where he has a much greater chance of earning a performance fee.
Now I cite this particular posting to show how the Financial Masters of the Universe are working triple overtime to once again game the system and preserve their exalted income streams. Felix does a superb job of applying QED. The embarrassing fact is that it is not just the financial system that is broken and bankrupt but many, if not most of the key players and managers. Is this the kind of people that Obama wants to build reform upon? Nationalization of the banks is starting to make much greater cents – hundreds of trillions worth.