1. Compare hedge funds with mutual funds.

2. Do you agree that the top hedge fund managers deserve their high salaries? Why or why not?

Along with the rest of the banking and investment industry, hedge fund managers experienced steep drops in income during the recent recession. But as the economy began to revive, the 25 top-earning hedge fund managers earned $25.3 billion. That figure shattered even the old record, set in the boom days before the crisis.

One of those managers was David Tepper of
Appaloosa Management. Other investors feared that the
banking sector would collapse again, but Tepper bet that
the federal government would step in to prevent the biggest
banks from failing. In late 2008 and early 2009, he
invested heavily in preferred shares and bonds of the big
banks, among other seemingly losing prospects. Tepper,
formerly of Goldman Sachs, won big, earning $4 billion.
“We bet on the country’s revival,” he said. “Those who
keep their heads while others are panicking do well.” The
U.S. Treasury Department apparently agreed with him,
because it also bought preferred stock in troubled banks
to help shore them up. The Treasury has since sold many
of those stocks at a handsome profit.

Hedge funds are elite, private investment companies that are open only to highly qualified, large investors. Unlike mutual funds, hedge funds are not regulated by the Securities and Exchange Commission. During the heady days before the financial crisis, hedge funds earned huge profits. Their managers did well, too, because they usually take a significant percentage of a hedge fund’s annual earnings. When the crisis struck, even these funds experienced losses in the double digits, and their managers saw their income drop by as much as 50 percent. But when the market rallied, hedge funds resurged as well. Of the 25 top hedge fund managers, the lowest earner made $350 million.

As the United States and the rest of the world economies recovered, the news media reported the immense salaries of CEOs and other top corporate executives at banks and large brokerage houses. The stories stirred the critics, especially because ordinary people were losing their jobs, homes, and health insurance. But some analysts believe that hedge fund managers such as David Tepper earned their huge salaries because they dared to take big risks in the hope of big rewards.

Of course, not all hedge funds did well when the stock market revived. The gap between the highest-earning hedge funds and the losing ones grew wider. Nadia Papagiannis, a hedge fund analyst at Morningstar Inc., said, “The hedge funds that survived 2008 were able to capture the gains on the way up in 2009. This year is not going to be as lucrative as last year. There’s not enough of room [sic] for another rally as big as we saw in ‘09.”