In today’s world, leaders of the financial industry are often viewed as the billionaires who manage funds on Wall Street, New York City’s infamous financial district. These billionaires typically manage hedge funds, which are investment pools where financial experts take on investors and utilize a pre-determined market strategy to mitigate risk and maximize returns (Fung & Hsieh 2015). What is so unique about hedge funds is that they involve a wide variety of types of securities, such as equities, options, bonds, ETFs, etc. By having a more versatile portfolio, hedge fund managers are able to take control of the winning positions while, in effect, “hedging” other positions to ensure that large losses are not taken (Fung & Hsieh 2015). When investors decide to give their money to hedge funds, they want to see various strategies and whether they have demonstrated success in the past. If a hedge fund decides to take on a new client, they must enter into an agreement where the hedge fund is held solely responsible for the outcome of the client’s funds (Vulcan Post 2018). Although clients have the potential to make significant returns if the management of their funds is done well, the leaders of hedge funds often accumulate huge wealth. The following article will explore in depth exactly how hedge fund managers are able to accumulate this wealth, specifically examining the success of Calvin Lo, a billionaire investor from Hong Kong.
According to Forbes, Calvin Lo has a net worth of approximately US$1.7 billion (LUXUO 2019) and separately has set up a foundation in excess of US$245 million for his philanthropic initiatives. Lo was a board member of the Jane Goodall Institute from 2006 to 2018, and advocated the well-being of animals, the community and the environment.
Lo maintains a low profile when he does his work, which is why his name is not known worldwide; however, his success has made him into one of the wealthiest men in Hong Kong and a very powerful investor. He has amassed the majority of his fortune by managing and being the CEO of R.E. Lee International. This is a “life insurance brokerage that provides estate planning and business succession solutions to ultra-high net-worth individuals and businesses” (LUXUO 2019). Lo expanded the business into asset management and founded R.E. Lee Capital. He incorporated some of his own investment techniques to improve the success of the fund, gaining him notoriety and leadership qualities. Today, the fund manages approximately US$8 billion dollars (LUXUO 2019). It is possible to estimate the total net worth of this fund because taxes are reported at the end of each year from the hedge fund itself and its clients. Consequently, it is possible to make various calculations based on the information that funds must report to the government in order to properly operate under legal terms. Currently, there is a lot of up-and-coming opportunity in Asia’s global market which is why hedge funds and similar asset management companies are thriving and able to sustain themselves for many years by taking on more and more clients (Vulcan Post 2019). It is therefore likely that Lo will continue to be able to bring in large amounts of success for his clients.
It is important to note that Lo’s type of clientele has significantly contributed to his ability to generate such a fortune. As is the case with any type of hedge fund, the more money they have accessible, the easier it is to turn that money into more money. This is because growth occurs exponentially and is a percent of the original amount of capital made available (Cassidy 2017). If funds were to take on clients with smaller net worths, the exponential growth would take much longer and, after fees were taken for the work in the ensuing years, the profit would not be very large. However, outsiders who are not “in the know” with hedge fund management often wonder how the CEOs and other important leaders make so much money per year when they are managing money from other people. Even though fees are earned, it seems hard to believe that these managers are worth billions themselves. In fact, some of the yields seem outrageous, just like how CEOs in tech companies are able to have very high yearly salaries even when regular employees have base pays and the company itself may not be entirely profitable.
According to journalist John Cassidy (2014) in his article for The New Yorker about how hedge fund managers make so much money, these managers charge large fees simply to allow clients to have their money managed. Once people gain notoriety in their communities, high net worth individuals will be flocking to their offices to have their money managed since they do not want to manage their money themselves. When large money is at stake, these managers are capable of charging fees for the work that they do and the clients will agree. Cassidy also claims that since returns on investments are not as high as they used to be due to changing market conditions, it is difficult to imagine that these managers are making billions from their strategies alone. Although the top hedge funds still do much better than more “normal” investment funds when it comes to money management and generating returns, the salaries for the CEOs may remain a mystery or be entirely attributed to the outrageous fees they charge to manage this money.
In the case of R.E. Lee Capital, the asset under management is US$8 billion dollars. The industry average annual management fee is 2% and 20% for performance. If the fund yields a 20% return per year (R.E. Lee Capital’s historical returns is 24.5% per year), that equals US$1.6 billion, 20% of which is US$32 million for the performance fee; add this to the 2% charged for management fee of US$160 million, revenue to R.E. Lee Capital will be US$160 million per year. Moreover, the average industry profit margin is 40%, which would equate to USS$76.8 million annually from that US$192 million. With this in mind, it makes sense how hedge fund managers can accumulate such incredible wealth.
It is evident that the management of a hedge fund is not easy, as CEOs have to determine many different market strategies according to the current market conditions and long-term goals. They must partner with certain types of clients who they believe will help to generate the largest amounts of returns while being able to mitigate risk. Finally, they must develop trust with their clients and demonstrate that they have long-lasting ability to continue making profits. For a hedge fund manager like Lo, who eventually climbed the ranks at R.E. Lee International and now has a net worth of over US$1.7 billion dollars, it seems strange that few people have heard of his name. This, however, is because he prefers to keep a low profile to protect his information and that of his clients. People continue to wonder how the leaders of hedge funds make outrageous salaries even if they yield returns, although this information may not be obvious for quite some time since most information is not readily available.
Cassidy, J., 2017. The Great Hedge-Fund Mystery: Why Do They Make So Much? The New Yorker. Available at: https://www.newyorker.com/news/john-cassidy/the-great-hedge-fund-mystery-why-do-they-make-so-much [Accessed March 20, 2020].
Fung, W. & Hsieh, D.A., 2015. Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds. OUP Academic. Available at: https://academic.oup.com/rfs/article-abstract/10/2/275/1588402 [Accessed March 20, 2020].