The high-rollers who run Wall Street’s top hedge funds essentially gamble with other people’s money, betting billions of dollars on such stuff as whether XYZ Corporation’s third-quarter profits will be one point lower than forecast. Doing this, they assert, is genius work, entitling them to be paid more than anyone else. Two years ago, for example, each of the top 10 hedge fund dealers averaged $175 million in pay — or about $84,000 an hour!
Sure enough, their bets on corporate performance usually turn out to be winners. How do they do that? Are they really Einsteins — or is something else in play?
Something else. The New York Times reports that a handful of big hedge funds have been systematically receiving insider tips from corporate analysts working at Citigroup, Goldman Sachs, Merrill Lynch and other Wall Street stock brokerages. These analysts, who are experts on the inner workings of particular corporations, have quietly been sending periodic insider updates on corporate performance to a few favored funds. The under-the-table updates reveal such key information as whether XYZ’s corporate profits are heading up or down, or whether management changes or other corporate surprises are in the works.
The insights of these analysts are supposed to be released only on a set date to the public at large, so no one investor gets an advantage. But the internal documents of the big hedge funds show that they’re getting an early peek, allowing them to make their investment bets before ordinary investors know what’s going on. With these tips, the funds make a killing, while non-privileged small investors often take a hit.
Like Las Vegas hustlers, high-strutting hedge fund whizzes aren’t brilliant or deserving — and certainly not ethical. They’re getting rich by gaming the system.
This opinion column does not necessarily reflect the views of Boulder Weekly.