Cliff Asness, founder and managing principal of AQRThere’s one problem with that much-publicized annual list of top-earning hedge fund managers, according to a former member: It’s not accurate.
AQR Founder Cliff Asness would have better insight than most, having appeared on it in 2001.
“Unfortunately, this list, published for many years now, makes little sense,” Asness wrote in a May 5 posting titled “An Annual Article About Nothing.”
Institutional Investor—the trade publication behind the long-running ranking—calculates earning figures by adding income from clients’ management and performance fees on top of returns generated by managers’ personal investments in the fund. According to Asness, top earners now tend to make more from their own allocations than from limited partners’.
“What we really have here is a list of people who started out the year very, very rich, that we also categorize as ‘hedge fund managers’,” Asness argued. “News flash! One way to make a lot of money is to start out with a very large fortune and make any non-trivial positive return on it.”
He pointed out that Bill Gates and Warren Buffett would probably be permanent fixtures if included in the running, regardless of how well or poorly their portfolios performed.
“From experience, I can tell you there’s a ton of guesswork involved.”
Indeed, 20 of the 2014 list’s top 25 earners were repeat inclusions. Appaloosa Management’s David Tepper came in first for the second year in a row—the third time in five years he’s held that position.
“Who among all of the world’s hedge fund managers started out really, really rich may be interesting to people,” Asness continued. “Moreover, if you’re making political arguments—say, about inequality—pointing at them may or may not be fair, but it’s almost a completely separate point from their income in 2014, the purported point of the list.”
Furthermore, the list only captures managers’ upside—or a rough approximation thereof. “From experience,” the AQR managing principal wrote, “I can tell you there’s a ton of guesswork involved.”
The list is fun, he acknowledged, as a ranking of people labeled hedge fund managers who entered the year with the largest bank accounts. “But if this list is misinterpreted as being significant information beyond that, as I believe it commonly is, well that’s a triumph of sensationalism and bad math over sobriety.”
Data from the 2014 edition of the Rich List appeared on the front page of the New York Times under the headline, “For Top 25 Hedge Fund Managers, a Difficult 2014 Still Paid Well.” It also appeared in the UK’s Financial Times with the headline, “Hedge fund pay down as top 25 managers bank total of $11.6 billion.”
At last check, it was the second-most viewed business article on nytimes.com and in third position on FT.com.
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