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Alpha Magazine: The Really Big Bucks are at the Top
By Stephen Taub - 05/24/06

This is the golden age of hedge funds.

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 Earguably the biggest motivation for the majority of
hedge fund managers Etimes 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ESteven Cohen, $550 million; and
Tudor Investment Corp.’s Paul Tudor Jones II, $500 million.

This year our list of the top 25 money earners actually includes 26
managers, thanks to a tie at No. 25 between William Browder of Hermitage
Capital Management and Marc Lasry of Avenue Capital Group. Browder is
one of eight managers who appear for the first time. (John Griffin of
Blue Ridge Capital, No. 18 with $175 million, returns to the list after
a two-year absence.)

Other newcomers are Pickens, David Shaw of D.E. Shaw & Co. (No. 9 with
$340 million); Timothy Barakett and David Slager of Atticus Capital (No.
14 and No. 20, respectively, with $200 million and $150 million);
William von Mueffling of Cantillon Capital Management, who is tied with
Barakett at No. 14 with $200 million; and Noam Gottesman and Pierre
Lagrange of London-based GLG Partners, both tied with Slager at No. 20
with $150 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.

Two managers who made the list last year EThomas Steyer of Farallon
Capital Management and Leon Cooperman of Omega Advisors Eare noticeably
absent this time. Both Steyer and Cooperman fail to qualify despite
earning at least $100 million, an amount that would have landed them
among the top ten managers just three years earlier.

This swelling of personal gains has made many hedge fund managers
enormously wealthy. By our estimates, at least 13 of the managers on our
list this year are billionaires ESimons; Pickens; Soros; Cohen; Jones;
Lampert; Shaw; Bruce Kovner of Caxton Associates and David Tepper of
Appaloosa Management (tied at No. 7); Israel Englander of Millennium
Partners (No. 11); Kenneth Griffin of Citadel Investment Group (No. 13);
James Pallotta of Tudor Investment Corp. (tied for No. 14), and Louis
Bacon of Moore Capital Management (No. 19).

Investors have long insisted that hedge fund managers have a substantial
percentage of their net worth tied up in their own funds to ensure that
the interests of all parties are aligned. Now, as hedge fund assets have
grown, and managersEassets in their own funds have grown with them,
managers no longer need to put up high returns to make a lot of money.
Six managers this year make the top 25 despite generating single-digit
returns: Caxton’s Kovner, Citadel’s Griffin, ESL’s Lampert, Tudor’s
Pallotta, Raymond Dalio of Bridgewater Associates and Och-Ziff Capital
Management Group’s Daniel Och.

“Clearly, there is a disconnect between pay and performance,Esays
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.E

As hedge funds have grown, management fees Ewhich mostly range between
1 percent and 5 percent, depending on the manager Ehave become an
increasingly important piece of the economic equation. Ten years ago a
$10 billion hedge fund was rare; today there are 20 managers who run at
least that much in assets.

“You can make T-bill returns and be just fine because you have a 2
percent management fee,Esays Mark Yusko, president and chief investment
officer of North Carolina–based investment advisory firm Morgan Creek
Capital Management.

Of course, some managers, such as Jeffrey Gendell of Tontine Associates,
have become very wealthy because of good old-fashioned performance.
Gendell made $215 million in 2005 thanks to a 38 percent net return,
which followed 100 percent-plus returns in 2003 and 2004.

The billions and billions of dollars being accumulated by hedge fund
managers is a concern for investors. “The wealth creates the potential
for major distractions for all managers who are successful,Esays Peter
Adamson, chief investment officer for the Los Angeles–based Broad
foundations and Eli Broad family office, which have invested more than
$1 billion in hedge funds. “Wealth has the potential to have a dulling
influence on a manager’s drive,Eadds Morgan Creek’s Yusko.

Still, investors like Yusko acknowledge that money is the ultimate
yardstick that the top hedge fund managers use to measure their success.

“In every profession, whether it is a football coach or a surgeon, the
best person makes the most money,Ehe explains. “The same is true with
investment managers. The great ones are hedge fund managers.E