Opinion

Felix Salmon

The value of a Nobel prize

By Felix Salmon
November 3, 2011

Dealbook’s Azam Ahmed explains why hedge fund Hutchin Hill has hired this year’s Economics Nobel laureate, Thomas Sargent:

While some of that research is pretty lofty, the rationale for hiring someone like Mr. Sargent is simple — that he can help the hedge fund figure out the effect of policy changes on people’s thinking, a critical element when judging how an economy will fare.

Well, that’s the ostensible reason, anyway — the reason given in Hutchin Hill’s September letter to investors. But it’s not the real reason.

The real reason why Hutchin Hill hired Thomas Sargent is — obviously — that he just won the Nobel Prize. After all, he was just as smart, and significantly cheaper, before he won the Nobel Prize, but they didn’t hire him then.

And why would Hutchin Hill want a Nobel Prize winner on their payroll? It’s not so that they can “find tremendous edge in understanding the impact of fiscal and monetary policy alternatives on global growth, risk appetite and asset prices”. After all, the whole reason why investors have entrusted $1.5 billion to the fund is because they reckoned Hutchin Hill was pretty good at doing that kind of thing already, and didn’t need the help of some NYU economics professor.

Hiring Nobel laureates, rather, is essentially a marketing function. They’re very useful people to get wheeled out in front of potential investors, who are wowed by the prize and thereby more likely to invest with the fund.

After all, the overwhelming majority of hedge funds are sold, rather than bought. There’s a famous handful with investors knocking on their door, desperate to invest. But most hedge funds — including Hutchin Hill — you’ve never heard of. But hey! You’ve heard of them now! They just got loads of glowing press in the New York Times! And not because of their returns, just because they managed to get the word “Nobel” into a press release.

Which is not to say that Ahmed shouldn’t have written this story. It raises interesting questions — among them, where the real value in a Noble prize lies, for economists. The prize itself is about $1.5 million, which was split this year between Sargent and Christopher Sims. That means Sargent’s getting $750,000 or so — not bad money, but probably less than he’s likely to get from Hutchin Hill.* (Remember the $5.2 million Larry Summers got paid by DE Shaw in just one year.)

But if Sargent’s imprimatur gets investors to commit say another $200 million to the fund, then that’s an extra $4 million a year in management fees alone — with essentially unlimited upside in terms of performance fees on top of that. He doesn’t need to provide any alpha at all to earn his keep — he just needs to be convincing in front of investors. Which I daresay he’s very good at. Especially now he has this prize.

*Update: I just spoke to Neil Chriss of Hutchin Hill, who explained to me that the deal with Sargent was agreed before he won his Nobel, and that Sargent will not be meeting any investors. (The deal was signed after the prize was awarded, but without any bump in the amount Sargent’s getting paid.) I’m also convinced that Sargent is not being paid anything like Larry Summers money, or even Nobel money, for this gig. For an economist, it seems, Sargent is quite bad at maximizing his profits from this prize.

Comments
5 comments so far | RSS Comments RSS

it’s hilarious/sad that this isn’t even mentioned as a potential reason by Ahmed.

Posted by zubin | Report as abusive
 

… well this is just terrible. Someone clearly studied hard, worked hard and achived the highest possible level of success in his field. Now that success being used to convince people to invest money that they earned with a company he works for….

…wait what’s the problem?

Posted by y2kurtus | Report as abusive
 

I guess Sargent could have waited until after the announcement to agree on a price. But maybe he thought he didn’t have good odds, and was relying on what he believed to be their inflated expectations of him winning.

Posted by TGGP | Report as abusive
 

Myron Scholes helped found LTCM before he was awarded the Nobel Prize, having already worked with John Meriwether’s group at Salomon Brothers, but his case still illustrates your point that Nobel Prize winners aren’t necessarily hired to help beat the market. Scholes may not have helped with active marketing (though some investors probably were attracted by the presence of two out of three of the creators of option pricing), but he did design “tax avoidance” techniques for LTCM. When the IRS fought the deductions, Scholes testified he wasn’t a tax expert, despite having written a textbook on the subject (the IRS won, with penalties: http://www.nytimes.com/2003/07/10/busine ss/10HEDG.html ). Along with LTCM’s demise (which suggested that Salomon’s arbitrage group’s profits came from being undercharged for its capital), this was more evidence that most of Wall Street’s returns are to toll collection, zero-sum gaming, and unethical and criminal acts, not market wizardry.

For more of this general argument see http://efficientmarkets.com/wallstreet19 97.html ; for how it works in the U.S. Treasury bond market, which I traded for J.P. Morgan for a dozen years, see http://ustreasurymarket.com .

Posted by formertrader | Report as abusive
 

I am disappointed to report that recent research shows that in many college professors, good honest intrinsic motivations like the pursuit of money are often crowded out by more venal desires such as the longing for the respect of one’s profession or expanding the frontiers of human knowledge. Cynical and mercenary I know, but that’s academia. Shameful.

Posted by LeighCaldwell | Report as abusive
 

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