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Fund Forward

Editor's Desk: Top Hedge Fund Managers May No Longer Rake in Billions of Dollars a Year

Alpha magazine dropped its first shoe when it released the salaries of the top 100 hedge fund managers, with the top master of the universe, James Simons, earning an astonishing $1.7 billion in 2006 and the top 25 an average of more than half a billion. In 2006, the compensation of this top 25 soared 57% from the year before and 127% from 2004.

A handful of news outlets ran the story, many condemning the nine- and 10-figure salaries as "obscene," "sheer avarice," "incredible greed," "inequality not seen since the 1920s"-and even "inherently immoral." The New York Times referred to this elite group of hedge fund managers as "alpha males...winning the Darwinian competition for capital."

And to put it in perspective, ABC News reported that "Alex Rodriquez is the highest-paid baseball player in America, $25 million per year. But in order to match the earnings of James Simons, A-Rod would have to play until he's 100."

So are these guys worth it? Certainly, the biggest hedge funds tend to deliver above-market performance and can get away with charging investors as much as a 5% management fee and 44% of profits.

But here's the other shoe to drop that's likely not only to get investors outraged but thinking twice about hedge funds. Last year, according to Hedge Fund Research, the average hedge fund returned 13%, trailing the S&P 500 Index's 14% gain. And since 2000, the average hedge fund, after fees, has only kept up with the market.

With all of the money flowing to hedge funds, particularly from pension plans, it will be increasingly difficult for hedge fund managers to find undervalued investments and deliver outsized returns. And as we report in this issue, hedge funds are now looking to appeal to a broader audience and lowering risk, and with that, perhaps sacrificing returns.

There have been recent reports that with hedge fund performance disappointing of late, some institutional investors with large hedge fund stakes are pressuring them to lower their fees from the standard 2% of assets and 20% of profits above a benchmark.

As Robert Discolo, manager of a hedge fund-of-fund at AIG Global Investment Group, told BusinessWeek: "In most cases, [managers] don't deliver enough to justify their fees. Most funds are doing things that can be replicated much cheaper."

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

http://www.mmexecutive.com http://www.sourcemedia.com

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Mutual Funds Must Go High-Tech-v. 3.0

Over the last number of years, mutual fund transfer agencies and shareholder communications companies have tried to convince shareholders to accept paperless summary prospectuses, proxies, trade confirmations and electronically stamped signatures. Fund supermarkets and web home pages have broadened their horizons to include market commentary, videostreaming and personal financial news. At the same time, exchange-traded funds, funds-of-funds, hedge FoFs, unified managed accounts, target dates, 401(k) auto enrollment and heightened awareness among people throughout the country of the difficulties of being retired-have taken off.

Test of the Massey Mine

Fund giant boards of directors at AllianceBernstein, American Funds, Fidelity, Vanguard and others are reportedly starting to bring about meaningful change in the corporations in which they are invested. Proof should come any day now, when the shareholder proxy votes from the annual meetings are released. Fund chief executive officers spoke about the power and influence their proxies wield in an interesting Reuters article last week, "Mutual Funds Seek to Shed 'Rubber Stamp' Tag."

Milestones

In 2011, 401(k) plans will turn 30, but the milestones the mutual fund industry has reached in this time are but a nanosecond in the history of U.S. retirement policy. Executives we interviewed for this special edition of Money Management Executive for the Investment Company Institute's meeting in Washington, speak to important milestones of the recent past and into the future. Look inside for observations and forecasts by Ted Benna, Robert L. Reynolds, Dan Fuss, David C. John, Steven Miyao and others.

At Age 30, It's Time for a Revamping for the 401(k)

This year marks the 30th anniversary of the 401(k), the revolutionary retirement savings vehicle that has been annihilating pension plans, empowering individuals to take part in the stock market-and, sadly, that left retirees with the misfortune of leaving the workforce in 2000 or 2008 very badly off. The cracks in the system are prompting many asset managers, regulators and retirement experts to take a hard look at 401(k)s and how they can be fixed.

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Lee Barney

Lee Barney served as editor of Money Management Executive from 2002 to 2010. Previously, at United Media’s Wall Street & Technology magazine and Risk/Waters Information Services, she covered financial IT. For TheStreet.com, she wrote the daily “Meet the Street” column covering a broad spectrum of market-moving events. Lee began her career as a reporter in Tokyo with The Japan Times and was executive editor of Spotlight magazine.