Hedge Fund Managers Make A Bundle in 2007

Hedge Fund Managers Make A Bundle in 2007

How The 10 Richest Hedge Fund Managers Got That Way
Wall Street Journal, April 16, 2008,
By Heidi N. Moore

Hedge funds are so plentiful that people sometimes sniff that anyone can start one. Not everyone, however, can be the Roger Federer or Tiger Woods of investing.

And just as Roger and Tiger have their techniques, so do hedge-fund managers, who used widely divergent strategies to capitalize on the market turmoil of last year. So says Alpha Magazine, which today released its annual listing of the 50 richest hedge-fund managers in the world, ranked by their compensation. Prepare yourself: it is so obscenely high in some cases that it will look almost lurid. (As Alpha cheekily explains, five of the hedge-fund managers on the list earned more than $1.2 billion each last year, or more than J.P. Morgan Chase is paying for all of beleaguered Bear Stearns.) The top 50 did so well that Alpha raised the bar for yearly compensation to $210 million from $200 million, locking out two perennial favorites.

Those who know the hedge-fund business won’t be particularly surprised that there were so many outsize successes. Hedge funds are most profitable when market volatility is high, and 2007’s roller coaster credit crunch certainly provided that. The glaring caveat is that hedge funds can reap profits in those roiling markets only as long as they can stay in business. The markets are fickle, and the threat is that today’s successful strategy can be tomorrow’s liquidation, as the collapse of Peloton Advisors proved. As they say in those fund documents: Past results are no guarantee of future returns.

Deal Journal took a look at Alpha’s list and how the 10 highest-paid managers made their money. We ranked them below by name, firm and the amount of their yearly compensation in 2007. All the returns and compensation numbers below come from Alpha, and you can view the full list on their Web site. As you will see, no single strategy dominated.

SUBPRIME MORTGAGES
John Paulson, Paulson & Co., $3.7 billion. Paulson made $3.7 billion last year, mostly by shorting, or betting against, subprime mortgage securities and collateralized debt obligations. One of Paulson’s credit funds earned a 590% return last year, according to Alpha; another racked up a 353% return.

Philip Falcone, Harbinger Capital Parters, $1.7 billion. There is no word yet on how much money Falcone has made from challenging the New York Times board, but shorting subprime mortgages clearly was a profitable decision.

ACTIVISM
Timothy Barakett, Atticus Capital, $750 million. Barakett made his money, and reputation, on derailing the Deutsche Borse from buying the London Stock Exchange. Atticus also pushed Barclays to drop its bid for the Dutch bank ABN Amro.

LONG-SHORT
Stephen Mandel Jr., Lone Pine Capital, $710 million. Mandel’s firm scored a 57% return through the tried-and-true strategy that hedge-fund managers call “long-short,” or buying some stocks while shorting others. Mandel shorted retail and consumer finance stocks last year.

John Griffin, Blue Ridge Capital Management, $625 million. As hedge funds have become larger and fancier, long-short almost seems a quaint relic, but Griffin scored a 65% net return in 2007 by just doing that.

Andreas Halvorsen, Viking Global Investors, $520 million. Halverson manages $9 billion and scored a 41% return. Last year, he expanded his focus on financial stocks such as Invesco, according to Alpha.

DIVERSIFICATION
Ken Griffin, Citadel Investment Group, $1.5 billion. In the past year, Citadel has increased its assets to $20 billion from a little more than $13 billion and has been active in buying businesses in widely divergent areas. Citadel snapped up part of the credit portfolio of troubled (and now defunct) Sowood Capital Management and bought bankrupt mortgage lender ResMAE. It also moved into providing administration services for hedge funds and split off a market maker in derivatives from its main business.

Steven Cohen, SAC Capital, $900 million. Cohen takes a 43% performance fee and had returns of only 13% in 2007. Still, his annualized returns are around 40%, according to Alpha, and his firm pursues everything from vanilla equity investments to credit markets, convertible bonds and emerging markets.

KEEPING THEIR SECRETS
George Soros, Soros Fund Management $2.9 billion. Soros’s $17 billion flagship fund scored a 31.7% return last year. How is anyone’s guess, but the fund did reduce its holdings in equities.

James Simons, Renaissance Technologies Corp., $2.8 billion: Renaissance’s flagship Medallion fund was up 73% in 2007.