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Friday, April 1, 2011

Top Paid Hedge Fund Managers of 2010

Alpha magazine is out with their annual ranking of the top paid hedge fund managers of 2010. Ten years ago, when the hedge fund industry was much smaller than it is today, it took 25 hedge fund managers to earn a combined annual payday of $5 billion. Last year this number was earned by John Paulson - primarily driven by his bet on Gold and the U.S. economic recovery.

Last year was very lucrative for some of the biggest and best-performing hedge funds’ chiefs. Wealth was so concentrated that a mere 25 people pocketed a total of $22.07 billion, according to this year’s annual ranking by AR Magazine, which tracks the hedge fund industry. At $50,000 a year, it would take the salaries of 441,400 Americans to match that sum.

If you track fund flows - which I do - you see that the larger funds are taking the lion's share of new capital. This results in many big funds getting bigger while smaller funds struggle to grow even if the performance is there. One result of this is a number of of top hedge fund earners pocketing massive pay days despite only single-digit returns for their investors. For instance, David Shaw of D. E. Shaw, a firm that uses complex algorithms to determine its investments, made the list with income of $275 million, even though his biggest fund returned a paltry 2.45 percent and over all the firm lost 40 percent of its assets. Other managers who collected big paychecks while their funds had mediocre returns included George Soros, who is retired but has most of his money in the $28 billion Quantum Endowment fund. The Quantum fund rose 2.63 percent last year, its worst performance since 2002. Likewise, funds at Moore Capital Management had mostly single-digit returns, but the manager, Louis Bacon, pocketed $230 million based on the increase in value of his holdings in the funds as well as a portion of the firm’s 3 percent management fee and 25 percent performance fees.

This leads me to believe that fees will inevitably come done. While I have no qualms about paying up for top performance, no one should pay up for mediocre performance. This is why I have always been a fan of having management fees just covering costs (maybe even small salaries for staff <$100k) then they bulk of their income coming from performance based payments. These payments should be deferred over multiple years that way managers don't get paid if performance lags after a big up year.

Enough with my ranting. Here is the official list:

1) John Paulson - Paulson & Co. - $4.9 billion
2) Ray Dalio - Bridgewater Associates - $3.1 billion
3) James Simons - Renaissance Technologies - $2.5 billion
4) David Tepper - Appaloosa Management - $2.2 billion
5) Steven A. Cohen - SAC Capital Advisors - $1.3 billion
6) Edward S. Lampert - ESL Investments - $1.1 billion
7) Carl Icahn - Icahn Capital - $900 million
8) Bruce Kovner - Caxton Associates - $640 million
9) George Soros - Soros Fund Management - $450 million
10) Paul Tudor Jones - Tudor Investments Corp. - $440 million

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