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Just What Do Hedge Fund Honchos Do For a Million Bucks an Hour?

Les Leopold's new book reveals that hedge funds make their super-profits by doing what the rest of us would call cheating.

It's a common belief that people are compensated more or less in proportion to the value they produce. Sure, it's an imperfect measure – why should teachers make a fraction of what personal injury lawyers take in? – but if someone's making billions of dollars per year, they must be doing something positive for society.

But what do those at the pinnacle of the economic pile – hedge fund managers whose compensation dwarfs that of the best paid corporate CEO – actually do? “A straight answer is hard to come by,” writes Les Leopold in his new book, How to Make a Million Dollars An Hour (Wiley). "Mostly these guys (and yes, they are nearly all guys) keep their efforts hidden from view. Trade secrets and mystical lore shroud their every move. Neither regulators nor the public have any idea how so much money is minted."

AlterNet caught up with Leopold to discuss the new book.

Joshua Holland: Les, congrats on the new book. We hear a lot about CEO pay, but really, it seems that these hedge fund guys are just putting most corporate CEOs to shame. Can you put the kind of spoils these guys are getting into perspective for us?

Les Leopold: Josh, you know this is America, and we are very accustomed to hearing about the rich and famous. To start the book I thought it would be good to take a look at the 10 richest musicians, athletes, movie stars, CEOs, lawyers, doctors, authors and other celebrities, and then compare them with these hedge fund managers. I couldn't believe what I found. Hedge fund managers make up to 100 times more.

For example, while the top movie stars averaged about $21,000 per hour, (which is nothing to sneeze at), the top hedge fund guys averaged a whopping $843,000 per hour. It was a revelation.

JH: So, what's the thesis of your book, in a nutshell?

LL: My thesis really flows from one basic question: How is it possible for a small firm like a hedge fund, with maybe 50 to 100 employees, to make as much money as a firm like Apple with more than a half-million employees and contractors worldwide?

In our free-market economy, what you earn is supposed to reflect the value you produce for the economy. The more you earn, the more value you allegedly produce in the form of goods and services. So if you make a lot of money making music, like U2 or Lady Gaga, it's because lots of people really enjoy your music. So hedge funds must be producing an astounding amount of value ... or there's something really screwed up about our economy.

What I discovered is that something really is screwed up because hedge funds do not produce value that comes anywhere near to what they are hauling in. Instead, they are siphoning away our wealth.

JH: You and I can't buy into them -- you have to be a "qualified investor" with a bunch of capital. And these qualified investors are supposed to be smarter than the rest of us, which is a kind of dubious claim given that they pumped up the housing bubble, and that's just a decade after they pumped up the tech bubble.

But hedge funds are at least supposed to serve a larger purpose for the financial sector, allowing wealthy investors to control the amount of risk in their portfolios. Is that not a valuable service?

LL: Well, you're diving right into the heart of it. What are these valuable services that hedge funds deliver to "earn" all that money? There are supposedly a bunch of financial good deeds that hedge fund cheerleaders tout -- like bringing liquidity to markets, increasing productivity, making prices more efficient, and the one you've hit on: they are supposed to help investors avoid too many risky investments.

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