WORKING FOR FREE

How long will the smartest & richest guys on wall street work for free? Well, not exactly free, but without the lucrative 20% incentive fees hedge fund managers get paid for investing profitably for their wealthy investors. Their regular management fees just aren't enough to make ends meet, and those ends are big.

Hedge fund managers are some of the highest paid people in the world. A good years bonus is like winning the lottery, in some cases the powerball lottery.

With 2008 shaping up to be the worst year on record for hedge funds; average long short equity fund is down approximately 20%ytd and many down 30%+, hedge fund managers will go without bonuses this year & they face a very high 'hurdle' in 2009.

In order for hedge funds managers to get their 20% incentive fee in 2009, the average manager will need to produce returns in excess of 25%. That would get their investors even... back to the high water mark, the high value of their investment prior to the recent decline. Above that, the incentive fee would kick in. Not impossible, but not easy.

So the question is, how long will these guys work for free? 2009 is looking increasingly more uncertain & risky...even with a trillion dollar infrastructure plan, bailing out the auto industry, backing up the financial & banking system, trying to support housing prices, employment still weakening sharply & consumers not consuming, businesses playing defense & in many cases contracting operations reducing spending & lowering capital expenditures, unknown new & ownerous regulatory environment to address recent failures, investors withdrawing from risk & in capital preservation mode...all in all a very difficult economic enviroment to develop investing themes & pick stocks. Not impossible, but certainly not easy.

Why not pack it in for 2009? Lower stress level, reduce risk of losing more wealth, watch things from the sidelines, & spend some time with the family.
Take some time to recharge the batteries, review the events of the past year & a half. Try to understand what has happened & what the implications are for the future. We have just been through & are still in the midst of an extraordinary historic period & its hard to really understand whats happening when you are immersed in it everyday & trying to react to all the news & data.

Why risk another down year, creating a further hole to dig out of? Why risk any further wealth destruction in such an uncertain environment that noone alive has any experience dealing with? Why risk being exposed to ongoing unprecedented & unknown financial & economic events? You aren't really being compensated for the risk or the responsibility.

Not many would fault you for making the decision. Our financial system has been completely changed. Our government has intervened in the markets in unprecednted ways. The FED & Treasury are actively trying to stabilze the system utilizing untested methods with consequences, both good & bad, that are yet to be fully understood. We have a new administration & congress headed to washington with plans to make many sweeping changes. Not exactly the enviroment one can expect to achieve 25% returns on stocks.

With that as the backdrop, it seems to make much more sense to come back in 2010-2011...a little time off might be a good thing.