Tuesday, May 30, 2006

Hedge Fund pay

$130,000,000. That is how much the 25th and 26th highest paid hedge fund managers made last year. The top spot? James Simon of Renaissance Technologies made about $1.5 billion (yes with a "b")!

From USAToday:
"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.""

From NY Times: (NY Times graph on hedge fund pay)

"The magic behind the money is the compensation structure of a hedge fund. Hedge funds, lightly regulated private investment pools for institutions and wealthy individuals, typically charge investors 2 percent of the money under management and a performance fee that generally starts at 20 percent of gains.

The stars often make a lot more than this "2 and 20" compensation setup. According to Alpha's list, Mr. Simons charges a 5 percent management fee and takes 44 percent of gains; Steven A. Cohen, of SAC Capital Advisors, charges a management fee of 1 to 3 percent and 44 percent of gains; and Paul Tudor Jones II, whose Tudor Investment Corporation has never had a down year since its founding in 1980, charges 4 percent of assets under management and a 23 percent fee."


"Hedge Funds are hot. With inflows from pension funds and university endowments, they are becoming more mainstream, making hedge fund managers better paid in 2005 than ever before. The top 26 earners brought home more than $130 million, and two earned over $1 billion."

For perspective the average CEO of an S&P 500 firm made about $11.75 Million last year while a mutual fund manager made about $400,000. Is it any wonder why mutual fund managers have been so ready to start their own hedge fund?

While some of this so-called "pay" is a return on investment, the sheer size of the pay when coupled with a lack of transparency that shrouds the hedge fund industry does hint of potential trouble. Remember the accounting games that have arose in the corporate sector due in part to misaligned incentives and information asymmetries. In the hedge fund world, we can only guess as to what may be happening.

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