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Edward Lampert of ESL Investments earned $1 billion in 2004, according to a survey by Alpha, a magazine published by Institutional Investor, which follows hedge funds. That is the highest sum in the four years since the magazine has been tracking managers' incomes. Lampert engineered the merger of US retailers Sears Roebuck and K-Mart in 2004. The average hedge fund manager on the Institutional Investor's list of the top 25 earners made $251 million in 2004, up from almost $136 million three years earlier. Hedge fund managers have an earnings formula that turns mutual funds managers green with envy. Mutual fund managers get a fixed percentage of the funds they manage but hedge fund managers generally make "1 and 20" - 1 percent of assets under management and 20 percent of profits. Lampert's estimated $1 billion profit is a result of the 69 percent investment return on K-Mart. The No. 2 earner James Simons of Renaissance Technologies, made $670 million after achieving a 24.9 percent return last year, after deducting his 5 percent management fee and 44 percent cut of the profits. The top ten earners in the hedge fund industry for 2004 were: Hedge Fund Returns 2004
"The returns of hedge funds were lower in 2004, hence the performance fee is lower," Ineichen said. "The global hedge funds industry is generating more fees than the much larger U.S. mutual fund industry." Hedge fund assets reached an all-time high of $1.1 trillion at the end of 2004, including funds set up to invest in other hedge funds. As stocks plunged after March 2000, millionaires increasingly invested in hedge funds to try and make money whether the stock and bond markets rose or fell.The average fund rose a net 8.9 percent in 2004, down from 19.6 percent in 2003, according to a UBS report. The fall in returns contributed to a 35 percent decline in performance-related fees earned by hedge funds to $29.6 billion last year.
The Standard & Poor's 500-stock index gained 9 percent in 2004 after a surge of 26 percent in 2003. "If the stock market goes up," Ineichen said in an interview, "hedge funds have higher performance fees." Big Fees also for Investment Banks Hedge funds provided a record $25 billion of revenue last year for top global securities firms, such as Merril Lynch, Morgan Stanley and Goldman Sachs Group, according to a research report published earlier this month by Credit Suisse First Boston, a division of Credit Suisse Group. The revenue represented about one-eighth of the securities industry's total and was up almost 20 percent from 2003, Marc Rubinstein, a CSFB analyst, said. Hedge funds now account for as much as 50 percent of the daily trading on the New York and London stock exchanges and more than 70 percent of the trading in convertible bonds, Rubinstein also said. According to The Economist, the SEC has brought 51 cases (11% of all its enforcement actions) against hedge funds, claiming damages in excess of $1 billion. Known prosecutions, as well as others that have yet to be disclosed, encompass around 400 funds. In only three of these cases were investors made whole, a result the SEC blames in part on the fact that it is able to investigate a fund only in response to receipt of a complaint. Last December, William Donaldson, Chairman of the SEC, had new rules for hedge funds approved. Funds will have to register and be open to SEC inspection. The Economist said that it would be no surprise if a series of announcements were to follow about hedge funds repricing their assets downwards and also, perhaps, reviewing how much they charge for compensation (the details of performance bonuses are complex and there is an assumption that they are mostly resolved in favour of managers). Top Hedge Funds Farallon Capital Management is the largest single-manager hedge fund firm in the world, according to Institutional Investor magazine’s Alpha 2004 Hedge Fund 100, the fourth annual ranking of the biggest single-manager hedge fund complexes by assets.With $12.5 billion in capital as of December 31, 2004, the San Francisco–based Farallon rises from fourth last year to dislodge Caxton Associates of New York, which held the top spot for the previous two years. Bridgewater Associates of Westport, Connecticut, captures second place, with $11.5 billion, compared with tenth place last year. New York–based Goldman Sachs Asset Management soars into third place, with $11.2 billion in single-manager hedge fund assets, up from No. 28 on last year’s list, when it had $5.4 billion. The firm says that about $2 billion of the increase comes from investments by new customers or investments by existing customers in new funds. The remainder consists of inflows into customers’ existing accounts and capital appreciation. Goldman edges out last year’s No. 2, GLG Partners of London, whose $11.2 billion puts it in fourth place. Moving into fifth place is London-based publicly traded hedge fund firm Man Investments, with $11.1 billion in single-manager assets as of December 31, 2004. Last year’s top spot, Caxton Associates, slips to tie New York–based D.E. Shaw Group for No. 7, with $10.8 billion in assets. Alpha’s Hedge Fund Top 5 — Total capital ($ millions) 1 Farallon Capital Mgmt $12,500 2 Bridgewater Associates $11,500 3 Goldman Sachs Asset Mgmt $11,242 4 GLG Partners $11,200 5 Man Investments $11,081 Alpha's Hedge Fund 100 is unique as a comprehensive source of information on assets and returns of the largest of funds, and has become the industry's benchmark in only three years. The listings provide each manager’s total hedge fund assets (before leverage) and, where possible, breakdowns at the individual fund level with one-year returns (net of fees). Funds of funds, funds that are subadvised by a third party (subadvised funds are credited to the actual manager) and assets managed in collateralized bond and debt obligations are excluded, along with private equity funds and vehicles that resemble private equity funds. Origin of Hedge Funds Hedge funds are pooled investments that can make money when the markets are falling or rising. Hedgeco.net provides the following on the origin of hedge funds: Alfred Winslow Jones, a sociologist, was working on assignment for Fortune magazine investigating fundamental and technical research on forecasting the stock market. The article reported on a new class of stock market timers, in addition to unorthodox methods of investing, all to achieve positive returns and call the market. Jones was very intrigued by these trading methods and became absolutely consumed with his own concept of an investment fund. Prior to the release of his Fortune article, Jones setup an investment fund with himself as general partner. The fund was designed as a market-neutral strategy, whereby the long positions in undervalued equities would be offset by short positions in others. This “hedged” position would allow capital to be leveraged, while also enabling large wagers to be made with limited resources. Another genius feature was having an incentive fee amounting to 20% of any realized profits or gains with no fixed fees. However, Jones’ greatest notoriety stems from his innovation that specific limited partnerships, if structured correctly, are exempt from regulatory control under the Investment Company Act of 1940. This exemption allows managers to utilize techniques, such as leverage and short-selling which typically binds other mutual funds and investment companies. Consequently, many copy -cats mimicked the fee structure, but not the “hedge” mentality and philosophy that Jones inspired. It was not until another Fortune magazine article, in 1966, which branded the market-neutral strategy that Jones’ designed as a “hedge fund”. © Copyright 2007 by Finfacts.com |
