Hedge fund chiefs get richer

You need to make $130 million a year to make it into top ranks of hedge fund earners

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June 02, 2006|By JENNY ANDERSON | JENNY ANDERSON,NEW YORK TIMES NEWS SERVICE

Talk about minting money. In 2001 and 2002, hedge fund managers had to make $30 million to gain entry to a survey of the best paid in hedge funds that is closely followed by people in the business. In 2004, the threshold had soared to $100 million.

Last year, managers had to take home - yes, take home - $130 million to make it into the ranks of the top 25. And there was a tie for 25th place, so there were actually 26 hedge fund managers who made $130 million or more.

Just when it seems as if things cannot get any better for the titans of investing, it gets better - a lot better.

James Simons, a math whiz who founded Renaissance Technologies, made $1.5 billion in 2005, according to the survey by Alpha, a magazine published by Institutional Investor. That trumps the more than $1 billion that Edward S. Lampert, known for last year's acquisition of Sears, Roebuck took home in 2004. (Don't fret for Lampert; he earned $425 million in 2005.) Simons' $5.3 billion flagship Medallion fund returned 29.5 percent, net of fees.

No. 2 on Alpha's list is T. Boone Pickens Jr., 78, the oilman who gained attention in the 1980s going after Gulf Oil, among other companies. He earned $1.4 billion in 2005, largely from startling returns on his two energy-focused hedge funds: 650 percent on the BP Capital Commodity Fund and 89 percent on the BP Capital Energy Equity Fund.

A representative for Simons declined to comment. Calls to Pickens' company were not returned.

The magic behind the money is the compensation structure of a hedge fund. Hedge funds, lightly regulated private investment pools for institutions and wealthy individuals, typically charge investors 2 percent of the money under management and a performance fee that generally starts at 20 percent of gains.

The stars often make a lot more than this "2 and 20" compensation setup. According to Alpha's list, Simons charges a 5 percent management fee and takes 44 percent of gains; Steven A. Cohen, of SAC Capital Advisors, charges a management fee of 1 percent to 3 percent and 44 percent of gains, and Paul Tudor Jones II, whose Tudor Investment Corp. has never had a down year since its founding in 1980, charges 4 percent of assets under management and a 23 percent fee.

They may charge it because they can. "In the end, what people want is the risk-adjusted performance," said Gordon C. Haave, director of the investing and consulting group at Asset Services Company, a $4 billion institutional advisory business. "As long as the performance is up there, in the end the investors do not care about the high fees."

If there is a downside to being so rich, it is that the money is flooding in at a time when hedge fund performance, even for some of the greats, has been less than stellar overall. Six managers made the top 25 even while posting returns in the single digits.

"You would think someone would be a little embarrassed taking all that money for humdrum returns," said John C. Bogle, founder of the Vanguard Group. "I guess people don't get embarrassed when it comes to money."

Many of the funds have gotten so big that the management fees alone are the source of much wealth, perhaps leaving some managers without the fire to try to outdo the broad market. Institutions, such as pension funds and endowments, whose money is fueling a significant part of the hedge-fund boom, continue to flock to these managers for their track records and name recognition.

Bruce Kovner's Caxton Global Offshore fund returned 8 percent last year while his GAMut Investments, an offshore fund he runs for GAM Fund Management, returned 6.4 percent. The survey said 2005 was the third year that he had posted single-digit returns. Still, Kovner took home $400 million, according to the list. He did not return calls to his office.

The average take-home pay for the 26 managers in 2005 was $363 million, a 45 percent increase over the top 25 the previous year. Median earnings surged by a third, to $205 million last year from $153 million in 2004.

Cohen of SAC Capital, who while shunning publicity has become known as an avid art collector, landed in fourth place in 2005, taking home $550 million. For the year, his various funds were up 18 percent on average. A spokesman for Cohen declined to comment.

In his debut on the list, William F. Browder, founder and chief of Hermitage Capital Management and the largest foreign investor in the Russian stock market, tied for 25th place by taking home $130 million.

Browder, 42, grandson of Earl Browder, one-time leader of the Communist Party of the United States, has been barred from returning to Russia since November, when immigration officials revoked his visa. His flagship Hermitage Fund, with $4.3 billion under management, was up 81.5 percent in 2005.

Browder could not be reached for comment.

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