Writer Tony Keller has an idea why hedge fund managers are able to make so much money.
Keller says it’s because they’re like the Lady Gagas of the finance world. Mere investment bankers, on the other hand, are like the back-up singers or song writers of the music industry, who will never make as much as the people they work with.
His argument stems from a 1981 paper by University of Chicago economist Sherwin Rosen, “The Economic Theory of Superstars.”
The difference Rosen identifies (and Keller likens to finance) is that Lady Gaga creates “software” that other people want, or need, so there’s an infinite limit on the amount of money she can earn. Her “software” could be bought by as many people there are in the world ∞ times.
Hedge fund managers create a kind of “software” too: their unique investment strategies (which they refuse to share because it’s so valuable). And so there’s an unlimited amount of money to make from investors. A near-unlimited number of investors can keep investing money until the manager says stop.
Compare their role to what investment bankers do. They (Keller uses Steven Traubner, Citi’s $30 million man, as an example) are able to add on value to a limited number of deals only.
From the Globe and Mail:
Yet i-bankers like Steven Traubner aren’t really full-fledged Rosen superstars. Unlike Lady Gaga and other star entertainers, Trauber does piecework. Each M&A is a one-off. Lady Gaga, in contrast, is software. She can earn a theoretically infinite amount of money from just one recording session: The resulting song can be purchased by millions of consumers worldwide. Or, as Rosen put it, in something close to English, “when the joint consumption technology and imperfect substitution features of preferences are combined, the possibility for talented persons to command both very large markets and very large incomes is apparent.”
The takeaway: If you want to be ridiculously rich, create a “joint consumption technology,” something unique that can be consumed by everyone an infinite number of times.