Can we explain this by saying many hedge funds are negatively correlated, along with survivor bias?
This is a huge simplification, but consider for every four hedge fund managers, one goes long the market, another short the market, another long volatility and another short volatility.
No matter what it's very likely one or two out of those four perform very well over one year. Start with enough hedge funds and throw on enough leverage and after a few years, there are bound to be some huge outlier-sized winners and many other blowups. It's like a big roulette table, but every possible outcome has someone betting big on it.
Contrast that with startups, where almost every startup has exposure to market beta (either in receiving funding or finding an acquirer). In addition, it's quite possible every music startup in the industry goes bust, or every PDA-maker startup, or every online poker startup, etc. The roulette wheel has an infinite number of bets, and can easily land so that no one wins.
Edit: I'm very convinced there are people with extraordinary skill in investing and/or in founding startups. I'm only suggesting how the Forbes 400 list could still exist if it was pure luck and no skill.
The roulette wheel model of hedge funds is even slicker, since other folks provide most of the money you're gambling with and you get to keep 2% of the chips you wager win or lose, and 20% of their winnings when you win.
Startups are usually short "establishment beta," i.e. if there is a profitable cash-cow company serving a particular set of customers, the typical startup wants those customers to be paying less money--to somebody else. Human needs are limited, and meeting almost all of them can be facilitated through a financial transaction.
The "beta" of finding funding or an acquirer is a funny kind of beta--it's highly unlikely that a great company will not get their first $1mm in funding because the VC world has just been deprived of $1b in assets allocated.
The cheapest way to short a startup is to bet on whatever establishment they're taking on. You could have shorted MSFT before they were public by buying IBM; if Big Iron kept on winning, you'd keep on getting your dividend checks. But startups are more akin to, e.g., long-shot CDS trades: the people betting against them get a predictable, incremental profit, or a massive, sudden loss.
Startups have the same phenomenom: for every product that people are not buying, there's a substitute that they're buying instead. Either that or consumers are stuffing their money under the mattress, but we know (from the savings rate data) that this isn't happening.
In some ways, there ought to be more variation with startups, because consumers will tend to pile onto the market leader because they're seen as reliable, which starves other firms in the industry and shifts resources onto a few big winners. The information cascades among consumer businesses can be much bigger than the information cascades among financial firms.
That accounts from some ways startups can be negatively correlated, but for the purposes of billionaire founders making the Forbes 400, I still say they are all hugely correlated to market conditions that enable crucial funding rounds, M&A events, and IPO events.
Also, if I think startup X sucks, it's not that obvious how I can bet against them and get rich on their dismal failure. But if I think hedge fund Y is doing stupid things, I can take the other side of their trades, and one of us will wind up rich.
"Also, if I think startup X sucks, it's not that obvious how I can bet against them and get rich on their dismal failure."
Compete with them. If you think startup X sucks, then enter the same market, gunning for the same customers, but serve them better.
It's harder to do this than for a financier to short a stock, but that's because everything in finance is higher leverage than in business. The goal of an entrepreneur is to do things better than established businesses; the goal of a financier is to predict which firms will do things better, and then divert capital to them. The actual effort involved in finance is simply a decision, but that decision needs a lot of information to be correct more often than it's wrong. (None of which changes the relative likelihood of wealth concentrating at the top of one of these fields.)
I don't follow. Say a startup comes along and I think the entire idea, space, and sector is doomed to failure. The whole market is a no-go. I can't get rich off the ones I decide will be failures, and it's possible for an entire sector to fail together in a correlated way. Say, Gmail crushes all web-based email startups, or iPhone crushes all startups based on the available 2007-era mobile platforms.
At least in financial derivatives trading, there is a somewhat zero-sum aspect to who is winning and losing money. Every dismal derivatives trade should have some winners on the other side.
This is a huge simplification, but consider for every four hedge fund managers, one goes long the market, another short the market, another long volatility and another short volatility.
No matter what it's very likely one or two out of those four perform very well over one year. Start with enough hedge funds and throw on enough leverage and after a few years, there are bound to be some huge outlier-sized winners and many other blowups. It's like a big roulette table, but every possible outcome has someone betting big on it.
Contrast that with startups, where almost every startup has exposure to market beta (either in receiving funding or finding an acquirer). In addition, it's quite possible every music startup in the industry goes bust, or every PDA-maker startup, or every online poker startup, etc. The roulette wheel has an infinite number of bets, and can easily land so that no one wins.
Edit: I'm very convinced there are people with extraordinary skill in investing and/or in founding startups. I'm only suggesting how the Forbes 400 list could still exist if it was pure luck and no skill.