The Wealth of Arab’s Collapsing Autocrats

What a tough couple of months its been for the autocratic regimes of of the Middle East. Who would have thought that a frustrated Tunisian fruit vendor who had been trampled on by his government for the last time, would light himself on fire and start a revolution spanning 11 Middle Eastern countries.

So how much wealth have these autocratic, and presumably corrupt, leaders amassed for themselves and their families?... I did a little digging around, and though its difficult to verify how accurate any of these numbers are, here are some of the figures I came across:

Hosni Mubarak -- According to U.S. intelligence estimates, former Egyptian President Hosni Mubarak and his family are believed to have a fortune ranging from $1 billion to $5 billion, a significantly lower figure than most estimates of the wealth accumulated by Mubarak during his 30 years in power. Most of his money is believed to be stashed away in foreign banks, real estate and business holdings.

Muammar Gaddafi -- The current (for now at least) Libyan leader Colonel Muammar Gaddafi, who has ruled the country for over 40 years and his family are believed to a fortune of approximately $20 billion. Again this figure comes from intelligence sources and is far below some recent rumors that peg his wealth at over $100 billion. The primary vehicle for his wealth accumulation has come from the Libyan Investment Authority (LIA), a $70 billion sovereign wealth fund whose founding purpose was to diversify Libya’s oil dependent economy.

Zine El Abidine Ben Ali -- The ex-Tunisian President whose downfall got the whole revolution started, was estimated to have amassed wealth exceeding $5 billion. His family’s fortune was amassed amid a more mafia-style form of corruption, where they demanded significant stakes in most of the country’s shopping centers, trading firms, property development companies, banks, media and telecommunication companies. Perhaps one of the more astonishing acts that occurred under the ex-President’s regime was when two of his clan members reportedly stole a yacht from a leading French banker. A story that came to light from some leaked U.S. embassy cables published by WikiLeaks.

3 Facts About the Hedge Fund Industry

Given all the hoopla this segment of the investment world gets, I thought I’d continue from last week’s blog post with a few facts about the hedge fund industry that you may or may not know:

1. $2.5 trillion in assets under management

Though the precise size of the industry is unknown (since so much is kept so secret), there are approximately 10,000 hedge funds that manage an estimated $2.5 trillion in assets. By comparison, there are just under 8,000 registered mutual funds companies in the United States who collectively manage $11 trillion.

2. Average pay is substantially higher than mutual funds

The average junior hedge fund portfolio manager earns a base salary of $150,000 while senior managers earn $180,000. Their bonuses however make a world of difference, with junior managers seeing average annual bonuses of $400,000 while senior managers average $500,000. Mutual fund managers by comparison earn an average of $144,000.

3. The industry beats the market... just

Between 1994 and 2005, the aggregate US stock market produced an average annual return of 10.6%, this return was marginally outpaced by the hedge fund industry which saw average annual returns of 11%. Mutual funds prodded along with 8% average annual returns. It should however be noted that in 2009, hedge funds charged average management fees of 1.65% and another 18.89% in performance fees, far more than the cost of either index or actively managed mutual funds.

Hedge fund manager earns record $5 Billion

Earlier this month I came across an article in the Wall Street Journal that reported on how hedge fund manager John Paulson earned $5 billion in 2010. Though I initially found the story some what interesting, it did not really capture my imagination. After all, what’s new about a bunch of really rich people throwing buckets of cash at a flavor-of-the-day hedge fund manager, who in the process becomes even richer than they are! The 2% asset management fee and 25% cut of profits is probably seen as a fairly small price to pay for the privilege of having Gordon Gekko be your personal banker.

However, after giving it some thought, I realized that the really were some compelling aspects to this story. For those of you who don’t know, John Paulson is the founder and president of New York-based hedge fund, Paulson & Co. which manages approximately $36 billion in client assets. His reputation was earned in 2008 when he made an extremely well timed (some say too well timed) wager on the impending collapse of the sub-prime mortgage market. In 2008, Paulson recorded investment gains of 590% and 350% in two of his funds within the firm through the purchase of credit default swaps, earning himself $3.6 billion, a then-record payday for any hedge fund manager in history.

Paulson’s ascent into the stratosphere of alpha male earners was slightly blunted in 2009 when he took a slightly slimmer pay check of $2.3 billion. His funds saw investment returns of 12%, which was highly respectable given the armageddon chaos that rocked the market for most of that year.

Come 2010 and John Paulson really made up for that 36% income decline. The $5 billion he personally netted in 2010 trumps the record he set in 2007-2008 betting against sub-prime mortgages. To put that figure into perspective, consider that Goldman Sachs, Wall Street's most profitable and notorious bonus machine, paid all of its 36,000 employees a total of $8.35 billion last year. A mere $3.35 billion more than Paulson got paid!

So you’re probably wondering, how did he do it? Well, approximately $1 billion came from the 20% performance fee his hedge fund charged on $5 billion in investment profits, as well as the annual management fees clients pay to keep their assets at the firm. The remaining $4 billion came from investment gains he saw on his own personal holdings, (i.e.) from being his own best client. At the beginning of the year, Paulson had approximately $10 billion invested with the firm, a sum that rose by $4 billion throughout the course of the year.

Though Paulson did not hit any out-of-the-park home runs in 2010, given that two of his primary funds rose 11% and 17% respectively, he juiced his returns by creating leveraged gold-denominated versions of his five funds. Paulson & Co. borrowed 20 cents for every $1 invested in its funds which was used to buy exposure to $1 of gold futures. This meant that investors had $1 of gold exposure for every $1 invested in other strategies. The 30% rise in gold prices last year resulted in the gold-denominated versions of Paulson’s funds seeing gains of as much as 45%.

5 Of The Worst Business Decisions Ever Made

I recently got into a conversation with a group of colleagues about what we thought were the worst business decisions ever made in the history of commerce. The open ended conversation eventually dwindled down to a list of well known usual suspects, like Coca-Cola’s introduction of the new Coke, a horribly reformulated version of its most iconic beverage. Or, Time Warner’s dot-com mania induced merger with AOL in 2000, now widely regarded as the worst merger in the history of all mergers. These notorious examples are well known, so I decided to do a little digging for some of the more obscure business fumbles ever made. In no particular order, here is my top 5 list:

1. Ross Perot blows the chance to buy Microsoft

In 1979, Ross Perot, the founder of Electronic Data Systems (now owned by Hewlett-Packard) and future presidential candidate, had his eyes set on purchasing Microsoft Corp. a then fledgling 30-employee start-up, who’s death star grip around the PC software market was just starting to grow. Ross Perot viewed the deal as a nice way to provide his clients with the type of corporate software they were asking for. However, a deal was never sealed because:

“Perot recalls Gates’ asking price as somewhere between $40 million and $60 million, which Perot found too high. When asked about the events, however, Gates says he put Microsoft on the block for $6 million to $15 million. In any case, neither party attempted to counter, and no agreement was reached.”

2. Apple fires Steve Jobs

In early 1983, Apple co-founder Steve Jobs went out of his way to hire John Sculley, then president of PepsiCo (PEP). Steve was looking for a CEO who could manage Apple’s rapid expansion. Friction between the two men started almost immediately with Steve getting taken off the development of the Lisa computer project, and instead being assigned to a project that ultimately produced the Macintosh.

The Mac launched in 1984 to a lukewarm response, and in 1985 the company posted its first ever quarterly loss and laid off 20% of its work force. In that year, John Sculley went before Apple’s board of directors and announced that he was:

“asking Steve to step down and you can back me on it and then I take responsibility for running the company, or we can do nothing and you’re going to find yourselves a new CEO.”

Well, thankfully Steve’s back, and neither Sculley nor the board have scarcely been heard from since!

3. Inventor of the oil drill neglects to patent it

In 1858, Edwin Drake, a one-time train conductor, was hired by Seneca Oil to explore ways to extract oil from below the Earth’s surface. The company agreed to finance the project, despite deep skepticism, and sent Drake to Titusville, Pennsylvania where oil deposits were believed to reside. After investing $2,000 in the project, Seneca Oil grew weary of its prospects and pulled the plug, sending Drake off with his unproven ideas. He approached salt drill operators with the technology he had developed thus far, while he continued working to improve it.

Eventually a workable prototype was developed, which eventually became the basis of the modern oil drill. However, Edwin Drake did not see much value in patenting the idea, which allowed other entrepreneurs to freely copy his prototype... Oops!

4. Excite passes up opportunity to buy Google for $750,000

In 1999, Larry Page and Sergey Brin, the founders of Google, came to the conclusion that their search engine project was overly interfering with their studies. They attempted to offload it by putting it up for sale to a slew of companies. Both Alta Vista and Yahoo passed on the offer, believing their superior technology would prevail. Google was finally offered to Excite’s CEO, George Bell, who deemed the asking price of $1 million too high. Vinod Khosla of Kleiner Perkins, an early venture capital investor in Google, went back for another attempt -- this time for $750,000 -- and was thrown out of Bell’s office.

Its worth noting that Excite’s market cap at the time was valued at $35 billion. The company went on to pay $425 million for iMall, $780 million for online greeting-card company Blue Mountain Arts, and sponsored Indy car driver Eddie Cheever Jr. for an undisclosed sum... Google’s market cap today is valued at $197 billion, while Excite is fully owned by IAC/InterActiveCorp, a company who’s market cap is less than $4 billion!

5. Western Union passes up on telephone patent

In 1876, Alexander Graham Bell and his partners offered to sell their patent on the telephone to Western Union for $100,000. Bell’s patent was hard won after a rather dramatic period of experimentation and development, including a morning race to the patent office against Elisha Gray who was working on acoustic telegraphy using a water transmitter. Bell's patent number 174,465, was issued in 1876 followed by a series of public demonstrations to show off the telephone’s potential.

Western Union’s CEO, William Orton, refused to purchase the patent claiming that his company had no use for Bell’s electrical toy. A short two years later, he told colleagues that if he could get the patent for $25 million he would consider it a bargain. Needless to say, Alexander Bell was no-longer interested in selling the patent. Western Union and the Bell Company dived into a years-long patent battle that eventually saw Bell emerge as victorious.