Hedge Fund Pay Soars To New Heights

by Phillip Morton, Investors Offshore.com

05 June 2006

If you are wondering just what happens to all those management and performance fees that hedge fund investors seem ever willing to pay, there's a good chance that they contributed to the wages of one of the hedge fund managers named in Alpha Magazine's new rich list, the twenty-six members of which earned an average of $363 million last year, 45% more than in 2004.

According to Alpha, an Institutional Investor publication, the highest paid hedge fund manager last year was James Simons of Renaissance Technologies, who earned a staggering $1.5 billion. He was closely followed by T.Boone Pickens Jr of BP Capital Management, who made $1.4 billion in 2005.

Typically, hedge funds charge a 2% management fee and take 20% of any trading profits over a certain level of returns. However, in the perverse world of hedge funds, investors often flock to the most expensive hedge funds because higher management and performance fees are often the mark of a successful manager. For example, Simons charges a 5% management fee and takes 44% of the fund's profits, according to Alpha editor Michael Peltz.

Simons returned almost 30% for investors in his $5.3 billion flagship Medallion Fund last year. Pickens Jr meanwhile, returned a massive 640% through his BP Capital Commodity Fund.

Although nobody knows for sure, there are roughly 8,000 hedge funds in existence, with assets in the region of $1.2 trillion. Their ability to make money in falling as well as rising markets has made them increasingly popular since the technology bubble burst and world equity markets plummeted in the early part of the decade.

The performance of Simons and Pickens Jr last year eclipsed even that of hedge fund legend George Soros, of Soros Fund Management, who reportedly earned $840 million last year, placing him third in the rich list.

SAC Capital’s Steven Cohen with $550 million and Paul Tudor Jones of Tudor Investment at $500 million, rounded out the top five, while places six to ten were occupied by: Edward Lampert, ESL Investments ($425 million); Bruce Kovner, Caxton Associates ($400 million); David Tepper, Appaloosa Management ($400 million); David Shaw, DE Shaw & Co. ($340 million); and Stephen Mandel Jr, Lone Pine Capital ($275 million).

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