The stock market has gotten crushed in the first few weeks of 2008 and we've actually given up all of the gains of 2007. It stinks to lose those hard fought gains, but if you are a hedge fund investor it get's worse. James Surowiecki highlights the problem with incentive structures at hedge funds in this great, short New Yorker piece.
Letting hedge-fund managers keep a chunk of their winnings gives them an incentive to do well for their clients: in theory, they get rich only if their clients do. In practice, though, things don’t always work that way. Fund managers get bonuses at the end of each year, and they keep those performance fees even if the fund eventually goes south.
Surowiecki goes on to compare incentives for Corporate Executives to the folks at Hedge Funds and finds they are remarkably alike. It's no wonder the lending bubble got so out of control, two of the major players in our financial system were incented towards short term performance.
There is still a lot of dot connecting to go, but this is a start.
