Wednesday, September 29, 2010

More bad news

The New York Times reports:
The big hedge fund D.E. Shaw & Company laid off 150 employees on Tuesday, or about 10 percent of its work force, Institutional Investor reports, citing unidentified people familiar with the situation. The cuts affected employees at all levels throughout at the company and included partners and portfolio managers, according to these people. D.E. Shaw’s assets have shrunk sharply as a result of big redemptions the past two years. D.E. Shaw, which is best known for its quantitative-based trading, oversaw about $21 billion as of July 1. That was down nearly half from two years earlier, when the fund, based in New York, had about $39 billion under management.
D.E. Shaw is the original quantitative hedge fund, founded eponymously in 1998 by David Shaw, a professor of computer science.  They've had a great track record over their first two decades--21% average returns from this article, but the last 2 years have been rough for just about everybody.  I was being recruited to work there early in my career, but discovered my GPA was too low for them.  Yet I'm living proof that even mediocre students can generate competitive risk adjusted returns, so their loss!

I'm estimating this is $30-40 million in annual income that has been vaporized from the local economy, and more than $3 million in state and city tax revenues, which is about 20 government jobs that will need to be cut as well (not to mention the even greater impact on the federal budget).  Teachers, policemen, fireman, prison guards, ... where will it come from? (Not that anyone is asking, but how about reducing some school administrators, since they outnumber teachers, and some idling regulators).

What's worse is that the remaining employees at D.E. Shaw are probably staring at pay cuts, which will reduce tax revenues even more 2010 (vs. 2008) than the layoffs.  I suspect their performance this year is in the -2% to +6% range, so an order of magnitude less than they are used to.  Assuming a 2% management fee, their non-performance revenues have been cut from $800 to $400 million per year.  And they could erode further, if redemptions continue and/or fees shrink.

Also, the government is looking to tax such workers more, too, so let's just forget about job creation from that sector.

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