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Hedge fund managers rake it in

The trio at the top made more than $1B apiece last year, charging huge fees in an elite business exploding with wealth.

By New York Times
Published April 26, 2007

James Simons, a 69-year-old publicity-shy former math professor and code breaker for the Defense Department, uses computer-driven mathematical models to make bets on stocks, bonds and commodities, among other things.

His earnings last year were $1.7-billion.

As one of the leading hedge fund managers, Simons makes a sum that dwarfs that of the top chiefs on Wall Street. The highest paid on the Street, Lloyd Blankfein of Goldman Sachs, earned $54.3-million in salary, cash, restricted stock and stock options last year. (Unlike the total for Simons, Blankfein's reported compensation does not include gains on investments.)

And Simons, the founder of Renaissance Technologies, is not the only member of the $1-billion-plus-a-year club.

Two other hedge fund managers, Kenneth Griffin and Edward Lampert, each took home more than $1-billion last year, according to an annual ranking of the top 25 hedge fund earners by Institutional Investor's Alpha magazine, which came out this week.

The rewards for managing hedge funds - lightly regulated private investment pools for institutions like endowments and wealthy individuals - have been lucrative for some time. Yet the survey also shows that for the hedge fund elite, the rich are getting much richer in a hurry.

To make Alpha's list, a manager needed to earn at least $240-million last year, nearly double the amount in 2005. Combined, the top five hedge fund managers last year earned $14-billion - enough to pay for nearly all three of the newly proposed nuclear power plants in Florida.

With the modern gilded age in full swing, hedge fund managers and their private equity counterparts are comfortably seated atop one of the most astounding piles of wealth in American history.

"You had railroads in the 19th century, which led to the opening up of the steel industry and huge fortunes being made," said Stephen Brown, a professor at the Stern School of Business of New York University. "Now we're seeing changes in financial technology leading to new fortunes being made and new dynasties created."

But as hedge funds and their private-equity brethren begin to emerge more onto the public stage - playing increasingly bigger roles in art and cultural circles, tiptoeing into the Washington lobbying game, and even selling shares of their own firms to the public - all aspects of their activities, their own compensation in particular, are raising eyebrows.

Topping Alpha's list for the second consecutive year, Simons uses computer-driven models to detect pricing anomalies in stocks, commodities, futures and options.

Even though he has some of the highest fees in the business - 5 percent of assets under management and 44 percent of profits - he trounces most of his competitors year after year. In 2006, the $6-billion Medallion fund posted gross returns of 84 percent - 44 percent after fees, explaining his $1.7-billion take.

Fast Facts:

Tampa Bay area ties to the top managers
The three biggest fish in the hedge fund business took home $1-billion-plus paychecks last year, Alpha magazine reports. And none of them was George Soros, who only came in fourth. The wealthiest managers, James Simons and Kenneth Griffin, are both investors in Tampa-based Walter Industries, along with Edward Lampert, the biggest shareholder in Sears Holdings. Walter is popular with quite a few of the hedge funds on Alpha's list. Other Tampa Bay area companies that have attracted the attention of well-paid managers include Flanders Corp., Checkers Drive-In Restaurants and Odyssey Marine Exploration. Average pay for the top 25: $570-million.
-- Helen Huntley, Times Personal Finance Editor

[Last modified April 25, 2007, 23:05:31]