Today's New York Times has an interesting article about the world's largest hedge fund, also known as the Harvard endowment. It's currently at $19.3 billion and growing, and while I'm not going to get into the whole issue of compensation for Harvard money managers, I'd like to make a pedantic point about the following paragraph:

Harvard notes that Mr. Mittelman's compensation as a percentage of the money he generated is a fraction of what a hedge fund would charge to do what he does. But Mr. Mittelman has no responsibility for fund-raising and is not accountable to investors, two key roles played by hedge fund managers. In addition, the fees hedge funds charge cover their entire operation, not just the compensation of a single manager.

This confuses the issue a bit. In addition to trading and organizational expenses, hedge funds charge two kinds of fees: a fixed management fee and a performance fee that provides a cut of profits. Typically, the management fee is what pays for base salaries, overhead, rent, fundraising, etc. The performance fee is essentially a bonus pool, and its sole purpose is to reward performance and attract investment talent. The controversial bonuses that Harvard pays to its managers are the equivalent of a performance fee; they don't receive any bonus at all if the fund underperforms its benchmarks. (In fact, Harvard probably has a better deal than hedge fund investors, who pay fees on all profits, even if the fund underperforms.) In other words, it isn't meaningful to point out that Mittelman's fee doesn't include the operational costs of the management company, since these costs are covered by another sort of fee entirely.

Also, it doesn't make sense to fault Mittelman for not taking part in "fundraising," since any hedge fund with $20 billion under management would probably have a separate fundraising department. It's called investor relations. Trust me on this.

Even after you add the management fee and other expenses, my guess is that Harvard is getting a pretty good deal, given the market price for management talent these days. The real question, of course, is whether any fund manager is worth $35 million a year. This isn't necessarily a moral question; it's a question of whether outperformance is really due to manager ability, and not to some mixture of luck and market conditions. I mean, if the markets are truly efficient, you might as well just turn the Harvard endowment over to this guy.