Matt Levine’s Money Stuff: Everyone Wants a Wounded Lion

Call options

The central fact of financial industry compensation is that agents get a call option on their principals’ returns. If you give me a billion dollars to manage, and I turn it into $2 billion (a 100% return), I’m going to charge you at least $200 million for that service, and you will be thrilled to pay it. That level of investing skill is rare and valuable, and the going rate for it is at least 20% of gains. If, however, you give me a billion dollars to manage, and I turn it into $0 (a negative 100% return), I am ...