The 25 highest-paid hedge fund managers across the globe have collectively earned $21.1 billion in 2013 – a 50% increase from the previous year, according to a recently-published survey by Institutional Investor’s Alpha magazine. The jump in fees is mainly due to some of the most robust equity markets since the fiscal collapse of 2008.
Betting Big On Airlines, Walking Away
Topping the list as the highest-paid manager for the second year running is David Tepper, founder of Short Hills, N.J.-based Appaloosa Management. Tepper took in $3.5 billion, largely thanks to his correctly bullish stance on the U.S. airline industry, including bets on Chicago's United Continental Holding, Inc. (NYSE:UAL) and Fort Worth, Texas-based American Airlines Group, Inc. (Nasdaq:AAL).
Steven Cohen, the founder of Stamford Conn.-based SAC Capital, came in second place, despite the $1.8 billion fine his firm paid to settle an insider trading case. Still, by collecting a 50% performance fee, Cohen took in an impressive $2.4 billion. He hit it big with bets on Boise, Idaho-based semiconductor manufacturer Micron Technology, Inc. (Nasdaq:MU) and Florham Park, N.J.-based Zoetis, Inc. (NYSE:ZTS), a maker of animal vaccines and medicines.
SAC Capital recently changed its name to Point72 Asset Management to signal that it has closed itself off to outside investors in order to focus exclusively on managing Cohen’s personal assets. For this reason, Cohen likely will not appear on Alpha Magazine’s future lists, which only track firms that manage outside assets.
63% Return on Housing, Financials
Paulson & Co.’s John Paulson rounds out third place. By betting against the U.S. housing bubble and making large bets on financial stocks, he watched his Recovery Fund skyrocket by 63%, taking in $2.3 billion in fees in the process. He struck it big with a bet on Charlotte, N.C.-based Extended Stay America, Inc. (NYSE:STAY), whose shares surged 26% from its Nov. 13 IPO until the end of the month.
Jim Simons, founder of East Setauket, N.Y.-based computer-based trading fund Renaissance Technologies, hasn’t actively managed money for his firm in several years. But in 2013, the motorbike enthusiast took the management reins, earning $2.3 billion and a fourth-place finish. His biggest hit was a bet on New York-based Bristol Myers Squibb Co. (NYSE:BMY). At one point Renaissance owned $430 million worth of the pharmaceutical company's shares.
Other top earners include activist investor Dan Loeb, known for writing aggressive letters criticizing corporate managers as founder of New York’s Third Point LLC. He earned $700 million and placed ninth on the list with bets on Japan's Sony Corp. (NYSE:SNE), Sunnyvale, Calif.-based Yahoo! Inc. (Nasdaq:YHOO) and Finland's Nokia (NYSE:NOK). Ray Dalio, founder of Westport, Conn.-based Bridgewater Associates – the largest hedge fund by assets, made $600 million – an impressive feat, given that his fund fell short of double digit returns. Dalio bets on currency pairs, commodities, bonds, and, to a lesser extent, equities.
Typical hedge funds employ a “two and 20” fee structure, which claims 2% of assets under management, plus an incentive fee of 20% of the profits. Alpha Magazine calculates earnings based on fees the funds charge investors, factoring in stake managers have in the management companies that collect those fees.
The Bottom Line
Although top managers grew their 2013 earnings on some astute bets (and some corporate cajoling), the majority of hedge funds did not manage to beat out the general market. Case in point: while U.S. equities climbed more than 32%, the average hedge fund return was 9%, according to Hedge Fund Research.