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8:30 AM Friday, May 27, 2005: The Dow and Nasdaq are at a six-week high. It's a nice feeling. It's hard to believe the climb will continue. The economy is slowing. Earnings are tight (though improving). The budget. The trade deficit. Oil. You know the story. It's time to take some profits off the table.

Yesterday Rochelle went broke. (See yesterday's column. Click here.) But my LBO (leveraged buyout fund) sold a a company for four times what they paid for it. What looks grim at the bottom of the cycle often looks better at another point in the cycle. In the heady late 1990s I invested in private equity funds, LBOs, hedge funds, and directly in startups. I wouldn't do that irrational exuberance again. Most of the startups failed -- lousy management. It's too hard to make up in earnings on good investments what you totally lost on bad ones. These days it's preservation of capital. Preservation of Capital. Repeat after me: Preservation of capital.

Also, more smell more roses. I played tennis for three hours yesterday, all singles. The old body was sore last night. But this morning, I feel great. Rigorous daily exercise is good. A friend who's 84 has lost four inches of height in the past few years and now can barely walk. He's healthy. But he hasn't done a tap of exercise in 30 years. I have to believe his present aches and pains are due to inactivity. End of lecture.

Hedge Funds Are Stumbling but Manager Salaries Aren't, writes today's New York Times.

At hedge funds, the rich just keep getting richer. Across Wall Street, fees for businesses from trading stocks to investing in mutual funds have been falling. But at hedge funds, those exclusive investment partnerships for the wealthy and institutions like pension funds, fees have stayed dizzyingly high, even as billions of dollars have poured into the industry and performance, on average, has faltered.

Last year, the top-paid hedge fund manager, Edward S. Lampert of ESL Investments, earned $1 billion, according to a survey to be released today by Alpha, a magazine published by Institutional Investor that follows hedge funds. That is the highest sum in the four years the magazine has been tracking these managers' incomes.

The average hedge fund manager on Institutional Investor's list of the top 25 earners made $251 million in 2004, up from nearly $136 million three years earlier.

The secret to the wealth of hedge fund managers is how they get paid. Instead of receiving a fixed percentage of the funds they manage, as mutual fund managers do, hedge fund managers generally make "1 and 20" - 1 percent of assets under management and 20 percent of profits.

That means that a $1 billion hedge fund manager earns $10 million just for opening the doors, and a lot more if his fund performs well. Investors are willing to pay more for these managers' talents because, at a time when stocks are doing poorly and yields on short-term Treasury securities are low, hedge funds hold out the hope of a better return.

This promise has become so seductive that the top hedge fund managers can basically name their price.

"You don't mind paying higher fees if you are getting rewarded properly," said Michael Strauss, chief economist for Commonfund, which invests on behalf of foundations and endowments.

Steven A. Cohen of SAC Capital Advisors, for example, takes as much as 50 percent of all profits his hedge funds earn, netting him $450 million last year, according to Institutional Investor. Even after this big cut, his funds still returned around 23 percent, not bad in a year when the Standard & Poor's 500-stock index rose 8.99 percent.

Another manager on the list, Kenneth C. Griffin, has a novel twist on the fees he charges. His firm, Citadel Investment, which managed some $11 billion at year-end and has close to 1,000 employees -- large for a hedge fund - does not charge a fixed fee for expenses. Instead, Mr. Griffin bills investors annually for whatever it cost to run the fund that year, a figure that fluctuates, but has been as high as 6 percent of assets, according to investors.

Last year, Mr. Griffin's largest fund returned 9.87 percent, far below its compound average annual return of 26 percent. Spokesmen for Mr. Cohen and Mr. Griffin declined to comment.

Still, some longtime investors in hedge funds worry that the steep compensation may make managers like Mr. Griffin less motivated to perform. Already, overall performance of hedge funds is faltering. Through April, hedge funds were down 0.7 percent, according to an index by Hedge Fund Research, a data firm. That is better than the S.&. P. 500, which was down about 4 percent in the period. But hedge fund investors are bracing for further losses for the month of May, after some complex derivatives trades went against a number of fund managers.

"When managers were earning double-digit returns, high expenses did not matter as much," said Antoine Bernheim, publisher of the U.S. Offshore Funds Directory. "But when you are in a low single-digit return environment, investors can end up breaking even or losing money. This is not a sustainable situation."

Somehow, though, hedge fund managers continue to attract huge sums under ever richer terms. Investors were clamoring to get into Eton Park, the $3 billion hedge fund started last November by Eric Mindich, a former Goldman Sachs executive. Investors in the new fund agreed not to withdraw any of their money for as long as three and a half years. Another recent start-up, by the financier Carl C. Icahn, charges a 2.5 percent fee for expenses and 25 percent of the profits.

Many of the 25 managers on the Institutional Investor list of top earners had outstanding returns. Mr. Lampert's estimated $1 billion profit, for example, came after returning some 69 percent to his investors, who benefited from the spectacular rise in the price of Kmart, the discount retailer that Mr. Lampert has merged with Sears, Roebuck.

The second-best performer on the list, James H. Simons of Renaissance Technologies, made $670 million after posting a 24.9 percent return last year, even after deducting his 5 percent management fee and 44 percent cut of the profits.

A spokesman for Mr. Lampert declined comment; executives at Renaissance did not return calls.

But other celebrated managers had disappointing results, yet continued to earn hundreds of millions.

Last year, George Soros made $305 million, even as his Quantum Endowment Fund rose just 4.6 percent. Mr. Soros's large earnings reflects the fact that much of the money managed by his firm now represents his own capital.

Outside investors pulled money from Soros Fund Management in recent years, after Mr. Soros announced that he would be investing more conservatively. His goal is to earn enough to support his charitable efforts, rather than to make big, risky bets like his famous multibillion-dollar gamble against the British pound in 1992.

Mr. Soros is not the only manager aiming for lower, less volatile results. Much of the vast sums flowing into hedge funds these days comes from pension funds and other institutions, which prize predictable performance over outsize returns.

The average pension fund is looking to make just 8 percent, after deducting fees, on its hedge fund investments, according to a recent study by the Bank of New York and Casey, Quirk & Associates, a consulting firm. That is a far cry from the returns of more than 25 percent generated by celebrated managers like Mr. Soros and Michael Steinhardt at their peaks.

Now that the performance bar has been lowered, there is less incentive for managers to make more aggressive bets, consultants said, especially when they can still charge the same steep fees they did in the past.

Investors in hedge funds say they are resigned to paying dearly for top hedge fund talent. "It's the law of supply and demand," said William Lawrence, chief executive of Meridian Capital Partners, which manages portfolios of hedge funds. "Over time, if the fees are not borne out by performance, the market will react."

The wretchedness of Excel and Powerpoint: They do well for Microsoft, but, for the rest of us?

+ Excel: Beware of promoters who fall in love with the fantasy of their Excel projections. Kristin Zhivago, a reader and author of "Rivers of Revenue," writes

Too bad those spreadsheets never show the real truth: the geeky company founder who is deathly afraid of public exposure, because things aren't "perfect enough," and so sabotages every attempt to get publicity; the entrepreneur who doesn't understand the importance of distribution, so fails to support it in any way; the CEO who ignores the conflicting messages sent by the two versions of his logo and company name that he uses in print and on the Web; the board members who never talk to customers, but who think they know everything about running the company; the guy who gets the loan for a half a million dollars, hires people and vendors, spends about $100,000, then one day disappears with the remaining $400,000...all real-life examples that I either witnessed close up and all had wonderful Excel projections, on paper.

+ Powerpoint: Beware of Powerpoint presentations. They contain snippets of facts, with often extravagant unsupported claims. They look "official." They're pretty. They confuse investors. Personally, I'd rather a detailed Word doc with real facts. Try not to use Powerpoints when giving speeches. Powerpoint makes you think and speak serially -- one point after another. That's not the way the brain works. It jumps around. It can follow several threads at once. It's more interesting that way. Powerpoint can't. A Powerpoint presentation puts the audience to sleep.

I don't make this stuff up:
+ 15% of Americans say they've interrupted sex to answer a cellphone call.
+ $400 million is how much ws spent in 2004 on adult films and pornographic images formatted for cellphones.
+ Cool whip will condition your hair in 15 minutes.
+ Salve suburn by emptying a large jar of Nestea into your bath water.

Should you buy a satellite radio? Yes, if you're using just in your car. No, if you want to buy a portable system and use it everywhere. Sync Magazine tested portable XM satellite radios in a bunch of locations -- from mountains, to the Empire State Building, to stadiums, to on the street, to open fields. Their conclusion:

We anticipated signal loss in the mine shaft and the subway, but in an open field and at high altitude? Spotty service mars an otherwise great idea.

Real exchanges during court cases:

Judge: I know you, don't I?
Defendant: Uh, yes.
Judge: All right, tell me, how do I know you?
Defendant: Judge, do I have to tell you?
Judge: Of course, you might be obstructing justice not to tell me.
Defendant: Okay. I was your bookie.

From a defendant representing himself . . .
Defendant: Did you get a good look at me when I allegedly stole your purse?
Victim: Yes, I saw you clearly. You are the one who stole my purse.
Defendant: I should have shot you while I had the chance.

Judge: The charge here is theft of frozen chickens. Are you the defendant?
Defendant: No, sir, I'm the guy who stole the chickens.

Lawyer: How do you feel about defense attorneys?
Juror: I think they should all be drowned at birth.
Lawyer: Well, then, you are obviously biased for the prosecution.
uror: That's not true. I think prosecutors should be drowned at birth, too.

Judge: Is there any reason you could not serve as a juror in this case?
Juror: I don't want to be away from my job that long.
Judge: Can't they do without you at work?
Juror: Yes, but I don't want them to know it.

Lawyer: Tell us about the fight.
Witness: I didn't see no fight.
Lawyer: Well, tell us what you did see.
Witness: I went to a dance at the Turner house, and as the men swung around and changed partners, they would slap each other, and one fellow hit harder than the other one liked, and so the other one hit back and somebody pulled a knife and a rifle that had been hidden under a bed, and the air was filled with yelling and smoke and bullets.
Lawyer: You, too, were shot in the fracas?
Witness: No sir, I was shot midway between the fracas and the navel.

Defendant: Judge, I want you to appoint me another lawyer.
Judge: And why is that?
Defendant: Because the Public Defender isn't interested in my case.
Judge (to Public Defender): Do you have a comment on the defendant's motion?
Public Defender: I'm sorry, Your Honor. I wasn't listening.

Judge: You are charged with habitual drunkenness. Have you anything to say in your defense?
Defendant: Habitual thirstiness?

May everyone have a great weekend. Get lots of exercise. Don't eat too much. Hug the kids and the spouse. Check out your portfolio allocation. We'll talk about it when I see you next on Tuesday.

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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