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Hedge Fund Riches: Another Look

A new tally indicates the top hedge fund tycoons earned even more in 2007 than indicated by a set of estimates published earlier this month.

John Paulson, whose firm achieved spectacular returns by being among the first to bet heavily on the sub-prime collapse, took in $3.7 billion, according to Alpha Magazine's annual ranking of the highest paid fund managers. That figure was a record high.

Illustrating the gusher of wealth creation that hedge funds have become, that $2.8 billion earned by last year's third-place manager (James Simons of Renaissance Technologies) was more than the grand total earned by Alpha's entire top 25 as recently as 2003. Last year's top 25 earned an average $892 million, up from $532 million in 2006, Alpha observed.

While all the titans making eight and nine-figure paydays own their firms, their profits are often shared with employees such as portfolio managers - sometimes even analysts and administrative staff - through compensation formulas tied to portfolio returns. So the growth trend of general partners' pay may be a reasonable proxy for those who work under them.

Commenting on Alpha's figures, MSNBC cited rising fee formulas as an important contributing factor to the growth. Some of the larger, more successful fund companies are supplanting the once-standard "2 and 20" compensation method (2 percent of assets managed plus 20 percent of profits) with bigger slices, such as "5 and 40," Ezra Zask of Lakeville Capital Management told MSNBC.

Alpha's fund-manager ranking differs from one published earlier in April by Trader Monthly. Both lists, however, show five individuals earned $1 billion or more last year.

In second place on Alpha's list, at $2.9 billion, is George Soros - a once-familiar name that had all but vanished from the hedge fund world in recent years. His fund group held sway in the 1990s, and he topped Alpha's inaugural list, published in 2002. In subsequent years, Soros stepped back from managing other people's money in order to concentrate on his politically-charged brand of global philanthropy and on running his own vast wealth. Last summer, anticipating a serious recession in the U.S., he resumed a more active role in managing his funds, according to a recent New York Times profile.

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AUTHOReFinancialCareers News Insider Comment
  • pe
    penteq
    26 August 2008

    SITUATION: Grave and worsening. Due to convergence of peaks in the 'demographic' and 'election' cycles, we now experience - low yields in 'money market instruments', low yield and high risk in all longer term 'fixed income' securities, unproductive returns in 'equity' securities, highly correlated risks in 'foreign' securities, plus high risk in 'commodities' and 'real estate alternatives.

    NEED: Non-Correlating, Low Risk, Productive, Investment Options.

    SOLUTION: Now - long Short, Market Neutral Portfolios. Next - Portable Alpha Portfolios.

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