There is a great scene in the Steven Spielberg movie Catch Me if You Can where Leonardo DiCaprio playing the young Frank Abiginale has his “Aha” moment. Frank’s parents have just gotten divorced and he has run away from home seeking a life on his own in NYC. He is down on his luck and is feeling sorry for himself when he sees an Eastern Airline pilot get out of a cab accompanied by several beautiful stewardesses.
Frank is stopped dead in his tracks at the sight of this pilot. The pilot and his bevy of women swoosh past Frank and head to the classy hotel where they are staying. There the pilot is given a big welcome by the manager before heading up to his room. On his way up, he signs autographs for wide eyed youngsters and advises them to stay in school. After watching all this, Frank decides that he too must become an airline pilot.
Catch Me If You Can is set in the early 1960s which is the only reason why anything in this scene makes sense. It is absurd nowadays to imagine an eight year old asking a commercial airline pilot for his autograph. Nor could one imagine the stewardesses accompanying that pilot being young attractive women and not dumpy and grumpy middle aged ones. Being an airline pilot was once a very prestigious, high paying job with loads of glamour. Now it is quite the opposite.
In his testimony before Congress in 2009, Captain Sully, the hero of the Hudson River landing, brought to light the tough working conditions faced by many modern commercial airline pilots. Over the past eight years the pay scale for most pilots has dropped by 30 to 40 percent on average. The starting pay for a pilot at a major is somewhere around $30,000 annually and it takes several years of seniority before you even begin to crack six figures and that is assuming that your airline does not go bankrupt. It is even worse for regional airlines where pilots are sometimes making only $14,000 to $24000 a year.
There are all sorts of reasons cited as to why pilots have been squeezed – deregulation, rising fuel prices, the cyclical nature of the industry. An important reason perhaps the most important one is supply. The requirements for becoming an airline pilot have lessened over the years. It used to require well over a thousand flight hours. Now new regional hires only need 300-500 hours. Before military experience was a given. Now less than 50% of all pilots have it. Somewhere along the line, airlines decided that having super experienced pilots was not as important as having a super plentiful pool of less experienced pilots who were willing to take a cut in wages. With supply up and demand volatile, the fortunes of the airline pilot profession went south.
While the salaries of airline pilots have tanked over the years, the salaries of hedge fund managers have skyrocketed. If there was a ever a profession that was on the cutting edge of pay and prestige the last ten years – the hedge fund PM was it. Hedge fund PMs made millions and sometimes tens of millions, hundreds of millions and in a few cases billions of dollars a year for a time. They have gone from being completely anonymous guys laboring behind Bloomberg terminals to business celebrities.
The real question though is how will this industry look 20 years from now? Lots of people are entering this industry or trying to at least. Everyone including the hedgefunds themselves get how grossly over compensated they are. That said they deliver returns. Even after this whole crisis you have not seen the collapse of 2 and 20, the industry standard performance fees. Many hedgefund managers are still raking in hundreds of million of dollars a year in salaries.
Now, I have no way to know whether this will continue or not. However, I can say that in order for it not to contiue, the barrier to entry to becoming a hedgefund manager will have to be lowered. That is the gate keepers of money will have to decide that they would rather go with the less experienced fund managers with no track record who is going to charge a significantly lower fee structure then the experienced fund manager charging a bundle. However, it is hard to imagine that happening given the potential reputational risk in getting a judgement call like that wrong. It is also hard to imagine people still getting 2 and 20 for generating easy alpha.
However, the battle develops, I can tell you one thing. The second the 8 year old on the street know what a hedge fund manager does and wants to be one is the second you should begin shorting the long term financial and prestige prospects of hedge fund managers. …