$363M is average pay for top hedge fund managers
Friday May 26, 12:16 am ET
By Adam Shell, USA TODAY
James Simons, a mathematician turned money manager who prefers hiring Ph.D.s over MBAs, inched out oil tycoon T. Boone Pickens Jr. as the world's best-paid hedge fund manager in 2005, collecting an estimated $1.5 billion, according to rankings released today by Institutional Investor's Alpha magazine.
In rising to the top of what amounts to a who's who list of the secretive hedge fund world, Simons, of Renaissance Technologies, unseated 2004's top earner and first-ever billion-dollar man, Edward Lampert of ESL Investments, who is best known for buying Kmart and masterminding the blockbuster deal to buy Sears. Lampert's earnings dipped to an estimated $425 million last year, down from $1.0 billion in 2004.
"These are staggering numbers," said Alpha editor Michael Peltz in announcing its fifth-annual list of Top 25 earners. "It took $130 million to make the list."
Pickens also topped $1 billion, earning an estimated $1.4 billion. The average pay of the 26 (there was a tie for 25th place) on the list was $363 million, up 45% from $251 million in 2004.
Other big-name managers with big-time reputations in the top 10 included: financier George Soros, who was named "the man who broke the Bank of England" in 1992 after a winning bet against the British pound netted him more than $1 billion; Steven Cohen of SAC Capital Advisors, whom BusinessWeek called "the most powerful trader on Wall Street you've never heard of" in a July 2003 cover story; and legendary trader Paul Tudor Jones II. "These top earners are the best of the best, the real superstars," says Ryan Pearson, senior vice president at hedge fund consultancy Greenwich-Van Advisors.
The surge in pay comes amid an explosive growth in the industry, which now has roughly 8,000 funds and $1.2 trillion in assets. A lucrative business model for hedge fund managers, which, on average, entitles them to 2% of assets under management and 20% of the profit, makes these large paydays possible, Peltz says. A $10 billion fund would earn $200 million from the 2% management fee alone. Super-successful managers charge even more. Simons, the No. 1 earner last year, charges a 5% management fee and 44% of profits, Alpha's Peltz says.
Simons, whose firm, Peltz quips, has enough "rocket scientists to run their own space program," makes its money trading "often and frequently" with the help of computers, trying to capture small price movements. Pickens profited from the boom in energy prices.
The managers didn't just line their own pockets. "I suspect they have made more money for their clients than themselves," says Charles Davidson, hedge fund director at Standard & Poor's.