How do fund managers make money?

How do money managers become so rich?

• Please excuse how simple this question is but I'm genuinely curious as to how money managers become gazillionaires when the best of them make about a 20% yearly return. Even if they start a fund with 1 million of their own money and make 20% a year while re-investing all their earnings, collecting a % of the total profit for the firm and collecting a management fee; I don't understand how their wealth can balloon from essentially a million in this example to hundreds of million within a relatively (less than 20 years) short time.

• Answer:

  The same way most people become incredibly rich. They leverage other people's money. It's all about OPM. Start small and demonstrate a track record of making money using a scalable strategy over 3 to 5 years. If you're making 50%+ per year but playing in penny stocks, no pension fund or HNW individual with half a brain is going to give you money. Once you demonstrate a track record, it makes it much easier to raise money from outsiders. In a hot market, it's not crazy to see a fund start with $2 million (friends and family money) and raise $100s+ million from outside investors in 5 years or less. Once you have $100 - $200 million assets under management (AUM) as a single investor, the economics get compelling very quickly. Scale the AUM to billions and suddenly the path to a 9-10 figure net worth is not insurmountable.