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Yes, annual hedge fund investment returns for the past few years are only half of what they were during the 1990s. And sure, the proliferation of new funds has made it difficult for managers to rack up big gains in most hedge fund strategies. But when it comes to pure wealth creation — arguably the biggest motivation for the majority of hedge fund managers — times have never been better. Thanks to the power of hedge fund math, driven by management fees and performance incentives, more managers are making more money today than ever before, as evidenced by our fifth annual survey of the biggest earners.
One year ago Edward Lampert of ESL Investments made headlines when he became the first manager in our 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 Management’s T. Boone Pickens. In 2005 math whiz Simons, we calculate, 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 our list. Rounding out the top five are three longtime managers: Soros Fund Management’s George Soros, $840 million; SAC Capital Advisors’ Steven Cohen, $550 million; and Tudor Investment Corp.’s Paul Tudor Jones II, $500 million.
One thing that never seems to change for this exclusive club: The cost of admission keeps going up. A manager had to earn at least $130 million in 2005 to qualify for a place among the top 25 money earners, compared with $100 million in last year’s survey and just $30 million in 2001 and 2002. 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.
“Clearly, there is a disconnect between pay and performance,” says Antoine Bernheim, publisher of hedgefundnews.com and president of Dome Capital Management in New York, which has been advising European institutional and private investors on their hedge fund portfolios since 1984. “People are getting paid extraordinary amounts of money for performance that is mundane.”
1 - James Simons
Renaissance Technologies Corp.
JAMES Simons’ legend grows apace with his portfolio and his philanthropy. Last year the veteran Long Island hedge fund manager’s quant-driven Medallion hedge fund returned 29.5 percent net. That was all the more remarkable given the $5.3 billion fund’s 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.