Want To Make A Difference? Don't Be A Hedge Fund Manager

NEW YORK, NY - NOVEMBER 18:  Traders work on the floor of the New York Stock Exchange (NYSE) on November 18, 2014 in New York
NEW YORK, NY - NOVEMBER 18: Traders work on the floor of the New York Stock Exchange (NYSE) on November 18, 2014 in New York City. The Dow was up in morning trading on news that Japanese government will the measures to stimulate the economy out of recession. (Photo by Spencer Platt/Getty Images)

Long before the 2008 financial collapse, the American economic landscape had shifted, plunging the country into something of an identity crisis. Manufacturing was down, far less tangible industries were up. Income inequality and nostalgia for a time when America “made things” became fixtures of the national conversation.

As Roger Martin put it in the Harvard Business Review in October, “Over the past 50 years the U.S. economy has shifted decisively from financing the exploitation of natural resources to making the most of human talent.”

“Talent” has a positive ring. And yes, there are some good things about an economy that favors talent -- that is, creative workers, as opposed to what Martin calls “routine-intensive labor.” Many of these creative people will flourish, and some of them will even “make things” that could truly improve people’s lives.

But Martin, an author and former dean of the University of Toronto’s Rotman School of Management, says a talent economy has a dark side, too.

“I started to take a dimmer view when I realized there was a large segment of talent that created no net benefit to society, and that segment was achieving the highest personal rewards in the modern economy,” he told The Huffington Post.

The disappearance of labor-intensive jobs, he argues, has accelerated income equality. Worse -- and hardly a shock to anyone paying attention -- many of those raking in billions at the very top aren’t exactly doing meaningful work. As others languish, this talent segment enjoys stratospheric gains.

Martin has articulated, at the HBR and in blog posts, his thoughts on what this means for the future of the American economy. HuffPost asked him to share his thoughts on something a bit closer to home: what it all means for young people starting out. If you want a successful career in the talent economy, but you also want to do something that might have meaning, or benefit society in some way, what might you want to know? What might you want to avoid?

What follows is his reply:

Build Value, Don't Trade It

The core imperative for a happy and fulfilling career in the modern talent economy is to focus your talent on building value, not simply trading it.

The paragon of the latter activity is the hedge fund manager, who simply trades value – and tolls it heavily on the way through. On behalf of his or her capital providers, the hedge fund manager trades liquid financial instruments. The only way to make a dollar for the capital providers is for someone on the other side of trade to lose a dollar. The hedge fund manager keeps 20 cents of the dollar of profit and gives the remaining 80 cents to the capital providers, making it a massively lucrative activity for the hedge fund manager. And in a great asymmetry of incentives, the capital providers absorb 100 cents of every dollar of loss, while the hedge fund takes none of that loss.

Minimal net value for society is created in this process. Value has just been transferred from the counter-party in the trade to the hedge fund manager and capital provider. Or vice versa: if the hedge fund manager loses money for its capital providers, the counter party walks away with the profit – and that counter-party might well be another hedge fund manager.

Huge Profits Don't Equal Huge Satisfaction

While it is a wonderfully profitable business for hedge fund managers, it provides little long-term satisfaction because it is a zero-sum game with equal and opposite magnitude of losers and winners. Over time, if you are in a value trading business, you have to wake up every morning knowing that, in order to make a dollar, you have to ensure someone else loses one.

If instead you work for or establish a company that builds a product or offers a service that makes the lives of its customers better off, and if the revenues from selling the product/service exceed the costs by enough to earn an adequate return for investors, then you live in a positive-sum game. Customers are better off than they were before having access to your product/service. The company makes enough money to invest in growth, which means hiring employees and buying machinery/equipment/real estate, all of which contribute to growing the economy.

In this case, you can go to bed every night knowing that you contributed value to customers, employees, shareholders and the overall economy. And if you do all of this in an environmentally sustainable way, you make the world a better place for your children, too.

Building Is Harder Than Trading -- But Also More Rewarding

The challenge for this path is that building value is harder work than trading value. It is difficult to figure out a way to generate new value to a particular group of customers and do so in a way that the value created (and therefore paid by them) is distinctly higher than the costs incurred. That is an inherently creative act -– even if it is done in the context of an existing company in an existing product line. The forces of competition erode existing value equations and demand the continuous process of upgrading value delivered and improving costs of doing so.

Trading value is much easier. Someone else has to create all the value, and all you need to do is shuffle it around and toll the players involved. The greatest skill required is that of convincing the providers of capital to traders to give you the capital to enable your trading -– even if they really shouldn’t. Raising capital is the greatest skill of hedge fund managers.

Hedge fund management is arguably the most lucrative occupation in America and is much easier than creating value. But the payoff to working harder and longer at the task of building net value for society is the satisfaction of using your talent for the world, not just for yourself.