In a year when hedge funds significantly underperformed the broader S&P 500 index, it is not uncommon for one to think that even the best paid hedge fund managers would see a drop in their earnings. But while the compensation of hedge fund managers across the industry as a whole may have remained subdued, the returns-based compensation structure of fund managers resulted in the best performing managers raking in huge payouts last year. According to Institutional Investors’ Alpha, the top 25 hedge fund managers earned $21.15 billion last year, a whopping 50 percent increase over 2012.
Tepper, Cohen Top “The Rich List”
Top among the list was David Tepper, founder of Appaloosa Management, who took home $3.5 billion. Tepper was also the highest earning manager in 2012. He founded Appaloosa in 1993 after working at Goldman Sachs. His two main funds returned a combined 42 percent last year on accurate wagering on the recovery of the US airline industry.
Second in the list is Steve Cohen of SAC Capital Advisors, who was fined last year a record $1.8 billion in an insider trading case and ordered to close his fund to outside investors. Unlike the typical 20 percent performance fee charged by most funds, Cohen takes a 50 percent cut on the returns. He made $2.4 billion last year on the back of a 20.5 percent gain on its multi-strategy fund last year.
Other big winners include John Paulson who came in third with earnings of $2.3 billion. Paulson made a name for himself in 2008 when he reaped big gains by betting against mortgages. James Simons, who previously ran Renaissance Technologies, was ranked fourth with $2.2 billion. He is the only manager to make the list in all the 13 years that Institutional Investors’ Alpha has been tabulating it. Kenneth Griffin of Citadel completed the top five with $950 million in earnings.
Activist investor Dan Loeb also figured in the top 10 list. He earned $700m last year and was placed ninth.
Exclusions and First Time Entrants
Every year Institutional Investor’s Alpha produces “The Rich List”. It does not include fund managers who manage only family money. Billionaire investors Carl Icahn and George Soros did not figure in the list since they both have stopped taking outside money.
In all, 20 managers in the top 25 list also appeared on last year’s list. Three hedge fund managers broke into the list for the first time. They are David Einhorn of Greenlight Capital, Jonathan Jacobson of Highfields Capital, and Nelson Peltz of Trian Partners.
Relevance to Job Market
The compensation of top earning hedge fund managers has little relevance to the job market but it throws light on the compensation structure within hedge funds. While compensation of those holding operational roles remain largely independent of fund performance, those involved in the investment process often have strong financial incentives to find winning investment ideas.