This is the golden age of hedge funds according to Alpha, a magazine published by Institutional Investor.
In 2001 and 2002, hedge fund managers had to make $30 million to gain entry to the annual survey of the best paid in hedge funds. In 2004, the threshold had soared to $100 million.
|James Simons, 68, of Renaissance Technologies, made $1.5 billion in 2005. Simons's $5.3 billion flagship Medallion fund returned 29.5 percent, net of fees. No. 2 on Alpha's list is oilman T. Boone Pickens Jr., 78, earned $1.4 billion in 2005, largely from 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. |
Last year, managers had to 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.
Six managers made the top 25 even while posting returns in the single digits. Annual hedge fund investment returns for the past few years are only half of what they were during the 1990s. Nevertheless, more managers are making more money today than ever before, as evidenced by Alpha's fifth annual survey of the biggest earners.
Alpha says that one year ago Edward Lampert of ESL Investments made headlines when he became the first manager in the survey to earn $1 billion in a year. This time there are two who break the billion-dollar barrier: James Simons of Renaissance Technologies Corp. and BP Capital Managementís T. Boone Pickens. In 2005 maths whiz Simons, earned a staggering $1.5 billion, edging out oil tycoon Pickens, who took home an equally astounding $1.4 billion from two hedge funds he quietly launched ten years ago. Although Lampert saw his earnings cut by more than half in 2005, he still made a cool $425 million, good enough for sixth place on the list. Rounding out the top five are three longtime managers: Soros Fund Managementís George Soros, $840 million; SAC Capital Advisorsí Steven Cohen, $550 million; and Tudor Investment Corp.ís Paul Tudor Jones II, $500 million.
This year the list of the top 25 money earners actually includes 26 managers, thanks to a tie at No. 25 between William Browder of Hermitage Capital Management and Marc Lasry of Avenue Capital Group. Browder is one of eight managers who appear for the first time. (John Griffin of Blue Ridge Capital, No. 18 with $175 million, returns to the list after a two-year absence.)
Browder, 42, grandson of Earl Browder, onetime leader of the Communist Party of the United States, is based in London because Russian President Putin has barred him from re-entering Russia following criticism of the standard of corporate governance.
Other newcomers are Pickens, David Shaw of D.E. Shaw & Co. (No. 9 with $340 million); Timothy Barakett and David Slager of Atticus Capital (No. 14 and No. 20, respectively, with $200 million and $150 million); William von Mueffling of Cantillon Capital Management, who is tied with Barakett at No. 14 with $200 million; and Noam Gottesman and Pierre Lagrange of London-based GLG Partners, both tied with Slager at No. 20 with $150 million.
The 26 managers on the list made, on average, $363 million in 2005, a 45 percent jump from the $251 million the top 25 earned in 2004. The average, of course, got a boost from the billion-dollar boys, Simons and Pickens. But the median earnings also grew, jumping by a third, from $153 million in 2004 to $205 million last year.
By Alpha's estimates, at least 13 of the managers on the list this year are billionaires ó Simons; Pickens; Soros; Cohen; Jones; Lampert; Shaw; Bruce Kovner of Caxton Associates and David Tepper of Appaloosa Management (tied at No. 7); Israel Englander of Millennium Partners (No. 11); Kenneth Griffin of Citadel Investment Group (No. 13); James Pallotta of Tudor Investment Corp. (tied for No. 14), and Louis Bacon of Moore Capital Management (No. 19).
The magazine says that investors have long insisted that hedge fund managers have a substantial percentage of their net worth tied up in their own funds to ensure that the interests of all parties are aligned. Now, as hedge fund assets have grown, and managersí assets in their own funds have grown with them, managers no longer need to put up high returns to make a lot of money. Six managers this year make the top 25 despite generating single-digit returns: Caxtonís Kovner, Citadelís Griffin, ESLís Lampert, Tudorís Pallotta, Raymond Dalio of Bridgewater Associates and Och-Ziff Capital Management Groupís Daniel Och.
Hedge funds, lightly regulated private investment funds 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 to 3 percent and 44 percent of gains; and Paul Tudor Jones II, whose Tudor Investment Corporation has never had a down year since its founding in 1980, charges 4 percent of assets under management and a 23 percent fee. 1 - James Simons
Renaissance Technologies Corp.
Alpha says that James Simonsí legend grows apace with his portfolio and his philanthropy. Last year the veteran Long Island hedge fund managerís quant-driven Medallion hedge fund returned 29.5 percent net. That was all the more remarkable given the $5.3 billion fundís 5 percent management fee and 44 percent performance fee. (The gross return was nearly 60 percent.) Even so, Medallion fell short of its roughly 34 percent annualized net return since its 1988 inception.
The magazine says that the odds are pretty good that Simons will figure out how to make up that shortfall. Many hedge funds are run by teams of pointy-headed rocket scientists, but Renaissance Technologies Corp. might be able to run its own space program. The 68-year-old Simons, who has a Ph.D. in mathematics from the University of California at Berkeley and has taught at Massachusetts Institute of Technology and Harvard University, has packed his East Setauket, New York, enterprise with math and computer whizzes. These quantitative specialists use arcane programs to trade the globeís most liquid securities rapidly and frequently, using lots of leverage.
The firmís new $3.4 billion Renaissance Institutional Equity Fund, which Simons says in an investor document has the capacity to handle as much as $100 billion in assets, got off to a slow start last year, rising just 5 percent from its August 1 inception through year-end. RIEFís $20 million minimum investment gears it to institutions; unlike the shorter-horizon Medallion, the new fund takes mostly long positions and holds them for relatively protracted periods. RIEFís gain in assets came as Simons moved Medallion ever closer to being a closed portfolio for himself, his friends and his employees.