A hedge fund is an investment vehicle and business structure that aggregates capital from multiple investors and invests in securities and other investment instruments. Professional management companies structured as limited partnerships or limited liability companies normally run hedge funds. They differ from mutual funds in that regulators do not cap leverage, and most of the investments are highly liquid.
Hedge fund managers oversee the investments of their respective hedge funds. For hedge fund managers to be successful, they must create a competitive advantage, have a well-defined investment strategy, high amount of capital, a robust marketing plan and a strong risk management strategy. Those who become successful make a lot of money annually, like the highest-paid hedge fund managers in 2018.
Bloomberg recently ranked top-earning hedge fund managers for the first time as part of its Billionaires Index. It revealed that the top 10 individuals made approximately $7.7 billion last year. These are the top 5 highest paid managers based on Bloomberg's estimates:
James Simons is the founder of the highly regarded quantitative hedge fund firm Renaissance Technologies. His total hedge fund income was $1.6 billion last year, making his net worth $16.6 billion. Forty-three percent of this income, or $680 million, was in the form of fees.
Simons retired in 2010 but still has a say on how Renaissance is run and makes money from its fund’s performances. Last year, the Renaissance Institutional Equities fund gained 8.5%, Renaissance Institutional Diversified Alpha returned 3.23% and Renaissance Institutional Diversified Global Equity made 10.3 per cent. The performance of Renaissance’s oldest fund, Medallion, is unknown as it is only open to owners and employees at the company.
According to Forbes, Simons is the 23rd richest person in the world.
Ray Dalio, the founder of the world’s biggest hedge fund, is regularly identified as one of the wealthiest in the industry. In 2018, his fortune rose $1.3 billion, powered by Bridgewater’s approximately $160 billion of assets. He reaped $610 million in fees.
Like Renaissance, Bridgewater excelled last year during financial market turmoil. Its flagship Pure Alpha strategy returned 14.6% to investors net of fees, its best performance in five years. According to Forbes, Dalio has a net worth of $18.4 billion, making him the 25th richest person in the world.
Ken Griffin, founder of Chicago-based Citadel, has been making headlines for buying penthouses and mansions across the globe, purchasing art and giving away millions of dollars to charity. His spending spree has been comfortably financed by strong performances from Citadel’s multi-strategy hedge funds.
Citadel’s flagship Wellington fund gained over 9%, while its global equities and tactical trading funds returned almost 6% and 9%, respectively. Those impressive performances saw Griffin’s personal fortune swell by $870 million in 2018, making him the 45th richest person in the world, according to Forbes. Of his total hedge fund income, $360 million is estimated to be from fees.
John Overdeck raked in $770 million in 2018, including $370 million in fees. Overdeck is the co-founder of Two Sigma Investments, a hedge fund that tracks large amounts of data to predict the prices of securities. In 2018, Two Sigma’s Absolute Return fund returned 11%, while its global macro Compass fund generated a 14% gain. Forbes ranks Overdeck as the 118th richest person in the world with a total net worth of $6.1 billion.
Two Sigma’s successful year also benefitted its other co-founder David Siegel. Like Overdeck, Siegel netted $770 million after their hedge fund made $3.2 billion for investors last year.
The computer science graduate was ranked the joint 118th richest person in the world by Forbes.