Whether it inspires awe or disgust, industry observers love
to gawk at how much money top hedge fund managers make
compared with the rest of the population. David Tepper of
Appaloosa Management, for example,
made $2.2 billion in 2012. Ray Dalio of Bridgewater
Associates made $1.7 billion. And Steve Cohen of SAC Capital
Advisors made $1.4 billion. At the same time, real median
household income in the U.S. for 2011 was
$50,054; the bottom 80% of the U.S. population only has 7%
of the nation's wealth.
What advantages do money managers have? How have hedge
funders and other members of the one percent attained their
millions--and sometimes billions--of dollars? In short, what
creates such inequality?
A new academic study released June 23 claims to have the
answer. Titled "It's the Market: The Broad-Based Rise in the
Return to Top Talent," the draft paper says that a good
education helps, but the driver of mass wealth accumulation is
the scalability inherent in technological advances. It is not,
however, a result of changing social norms on inequality or
consolidated managerial power that funnels money to the top of
the corporate pyramid.
"Skill biased technological change predicts that inequality
will increase if technological progress raises the productivity
of skilled workers relative to unskilled workers and / or
raises the price of goods made byskilled workers relative to
those made by unskilled workers," explain authors Steven
Kaplan (University of Chicago Booth School of Business) and
Joshua Rauh (Stanford Graduate School of Business).
For hedge funds, the new ease of managing and investing vast
sums of money using computers has made a few people very, very
"We believe that the U.S. evidence on income and wealth
shares for the top 1 percent is most consistent with a
'superstar'-style explanation rooted in the importance of scale
and skill-biased technological change," the authors wrote.
"In particular, we interpret the fact that the top 1 percent
is spread broadly across a variety of occupations as most
consistent with an important role for skill-biased
technological change and increased scale. These facts are less
consistent with an argument that the gains to the top 1 percent
are rooted in greater managerial power or changes in social
norms about what managers should earn."
Both authors are research associates at the National Bureau
of Economic Research and the article is slated to appear in the
Journal of Economic Perspectives later this year. The paper
uses hedge fund pay data as estimated annually in "
The Rich List" from Institutional Investor's
Echoing a point
made recently by Paul Singer of Elliott Management, an
increasing percentage of the Forbes 400 list attained wealth
through their own initiative and not inheritance. Many of the
wealthiest Americans also grew up middle class and, while they
benefited from good educations, did not have the advantage of
growing up rich.
Of course, policy helps. "These theories, interacted with
the incentive effects of taxes, regulations, and institutions,
also help explain why income inequality has not risen as much
in other countries such as Sweden and France," the authors
explain. "And while the private equity, venture capital, and
hedge fund industries have grown in these places, they have not
been scaled up to the extent that they have in the United
States. Disincentives related to tax and regulatory policy may
have caused both financiers and innovators in such countries to
locate elsewhere, in places like London and Silicon
It's the Market - The Broad-Based Rise in the Return to Top
Talent by Absolute Return