Top hedge fund managers soar into salary stratosphere
By TIM PARADIS
Associated Press
Monday, May 7, 2007
A handful of top hedge fund managers have joined the billion-dollar club: They had paychecks totaling more than $1 billion each in 2006 alone. After a strong year on Wall Street that brought record bonuses amid heightened interest in executive compensation, some managers have drawn a measure of notoriety for their whopping salaries.
"It's way more than the we've seen in the past. In terms of the dollar amount, the managers are making far more," said Daniel Farkas, a hedge fund analyst at investment research provider Morningstar Inc. "Part of it comes from the fact that the funds had good years last year."
What is to almost everyone an astonishing amount of money might not come as a surprise to those who have tracked the outsize returns of some hedge funds, which essentially are loosely regulated pools of capital. People or institutions that invest in hedge funds must meet financial minimums set by the Securities and Exchange Commission, because such funds often make investments that are riskier than those of more closely regulated investments such as mutual funds.
Hedge fund investors, who tend to be very wealthy individuals or institutions such as pension funds, often turn to these funds as part of a larger investing strategy because the funds use financial instruments such as derivatives to make their money.
Hedge fund managers typically draw their salaries from two sources, a cut of the fund's assets and a slice of returns. Though the percentages vary, often managers get 2 percent of overall assets and 20 percent of returns.
Some observers view the pay matter-of-factly, saying it simply reflects what the market will bear.
Take James Simons, a one-time math professor turned hedge fund manager, who last year earned an estimated $1.5 billion to $2 billion, according to Trader Monthly. Simons' firm, Renaissance Technologies, controls the Medallion fund, which showed a return of 40 percent last year, the publication said. By comparison, the Standard & Poor's 500 index returned 15.8 percent.
"The reason that people make as much as they do is because they're making so much for the institutions that they're working for," said Randy Shain, vice president at First Advantage Investigative Services, which creates reports for hedge funds and other investors on the backgrounds of hedge fund managers.
Shain contends that the results of these managers justify the pay. "It's not as if someone's losing because someone else is winning," he said. "I would argue that what they make is not obscene at all. ... These people wouldn't be making all of this money if you didn't have pension funds and funds of funds that were giving them all this money."
Shain contends that top hedge fund managers don't share a unifying characteristic, other than their ability to deliver returns for a number of years, solidifying their reputations among their investors.
John Arnold's Centaurus Energy posted an estimated return before fees of 317 percent last year, and hasn't done less than 200 percent since its founding in 2002, according to Trader Monthly. In making bets on energy investments, Arnold's estimated income was $1.5 billion to $2 billion last year.
Farkas said the size of hedge fund managers' pay in coming years will depend on the continued success of their investments.
"I think of it as analogous to the CEO pay controversy," he said. "There is some backlash, and you know the counter-argument is that there are a very few select and a very few talented managers. The irony there is everyone thinks they have the one who is rare and worth it and everyone else doesn't."
Regardless, "2007 could be another big year." he said.
