"The managers who did well last year were those who focused on fundamental primary equity research," said Carter Furr, a portfolio manager at Signature, an independent family office in Norfolk, Va., with $2.8 billion in assets.
"The guys who were paying attention to the macro picture, got caught up in the headlines and fear-mongering, lost sight of the fact we were having a stealth recovery in the United States," he said.
Pay for the top 25 earners came in at $14.14 billion last year. As high as that is, it was the lowest amount earned since the financial crisis in 2008, but comparable to the $14.4 billion the top 25 earned last year, according to Institutional Investor's Alpha. (See list below.)
Swashbuckling bets and robust returns are exactly what investors are hoping for—and paying for in outsize fees—when they allocate money to hedge funds. But far too often in recent years, investors have paid hefty fees for lackluster returns.
And last year was no different.
For the fourth consecutive year, most hedge funds failed to beat the market. The average hedge fund gained 6.4 percent last year, according to a composite index that tracks 2,200 portfolios compiled by Hedge Fund Research.
By comparison, the Standard & Poor's 500-stock index climbed 16 percent when factoring in dividends. In 2011, the average hedge fund lost more than 5 percent, versus a 2 percent gain for the S.& P. 500.
Despite those returns, investors put nearly $25 billion into hedge funds, bringing the industry's total assets managed at $2.6 trillion, according to the eVestment research firm. That is in part because of investors looking for better performance when bonds are paying low returns and the stock market remains volatile.
"The low fixed-income yields have become a major obstacle for pensions and others to achieve the rates of return that they need," said Kenneth Heinz, the president of Hedge Fund Research.
(Related Story: Why This CEO Asked to be Paid Less)
Even weak returns at the large firms can produce huge paydays. These firms oversee giant pools of money, typically charging a management fee and taking a big slice of any profits. Institutional Investor's Alpha arrives at its figures by estimating money managers' portions of fees along with the value of the personal stakes in their funds.
Even though the funds run inside Mr. Dalio's Bridgewater returned 1 percent to 12 percent, Mr. Dalio made much of his billion-dollar payday from the management fees the firm charges on the $83 billion in hedge fund assets it oversees, according to Institutional Investor's Alpha. A Bridgewater spokesman declined to comment.
Likewise, SAC Capital Advisors, based in Stamford, Conn., where several current or former employees have been charged or implicated in a long-running government insider-trading investigation, had a below-market return of 13 percent last year.
(Read More: SAC Capital Affiliate in Record Insider Trading Settlement)
But Mr. Cohen still pocketed $1.4 billion because his firm, which oversees $15 billion, charges investors a 50 percent performance fee. Mr. Cohen has not been accused of any wrongdoing, but SAC agreed to pay $616 million to settle two insider-trading charges. A spokesman for SAC declined to comment.
James Simons, the former chairman of the Stony Brook University math department, earned a big paycheck for a mixed performance at the company he founded. The funds housed inside the computer-driven trading operation of his Renaissance Technologies produced returns on funds ranging from a loss of 3.1 percent to a gain of more than 27 percent. (Read More: Mysterious Hedge Fund Gets Even More Mysterious)
Even though Mr. Simons, 74, hasn't handled the day-to-day management of the firm for three years, he landed in the fourth spot on the list with a payday of $1.1 billion last year, partly on the large sum of money he has personally invested in the firm's funds. A spokesman for Renaissance declined to comment.
Many others on this year's list posted double-digit, market-beating returns.
Kenneth C. Griffin, the head of Citadel, based in Chicago, whose two biggest funds nearly collapsed in the market rout of 2008 when they slumped 55 percent, has had two strong years. The firm's funds had a 2011 gain of 20 percent, followed by a robust 25.5 percent return last year.
It took Citadel nearly three years for its funds to climb to levels where they could once again charge their investors the lucrative performance fees.
For Mr. Griffin, who started trading convertible bonds in his dorm room at Harvard, his 2012 payday totaled $900 million, making him No. 5 on the list. A spokeswoman for Citadel declined to comment.
Another star manager betting big with a highly concentrated fund was Edward S. Lampert. His ESL Investments moved its headquarters from Greenwich, Conn., to Bay Harbour, Fla., last year.
The firm's returns jumped 20 percent thanks to big gains in Sears, which accounts for about 40 percent of the fund, and Auto-
Nation, which made up about a third. Another winning play for Mr. Lampert was an investment the Gap, which soared 67 percent. A spokesman for Mr. Lampert declined to comment.
The Gap and other consumer retail stocks also paid off for Stephen Mandel Jr. Some of the funds run inside his Lone Pine Capital, which oversees about $22 billion in assets. The firm collects a 1 percent management fee and a performance fee of 13 to 20 percent, giving Mr. Mandel a payday of $580 million last year, according to the rankings. A spokesman for Mr. Mandel declined to comment.
Rounding off this year's top 10 earners on the Institutional Investor's Alpha list were two managers who made profitable investments off the beaten track. Bets on residential mortgage-backed securities helped give Oculus—a $9 billion macro fund inside the D. E. Shaw Group, a hedge fund complex built by the computer entrepreneur David Shaw—a return of nearly 21 percent last year, its best performance since 2007. Another Shaw fund had its strongest returns since 2009 with a 15.6 percent gain.
While Mr. Shaw ceded control of the funds' management several years ago, he still has a large amount of money invested in the firm, which helped him to earn $530 million last year. E-mail messages to D. E. Shaw brought no response.
The highest-paid hedge fund managers all took home considerably more than the top-paid chief executives of public companies. At No. 10 on the list of hedge fund managers was Daniel S. Loeb, the activist manager of Third Point, who took on Yahoo, eventually earning board seats, and made big, winning bets on Greek sovereign debt last year. With a 20 to 21 percent gain in the funds he oversees, Mr. Loeb walked away $380 million richer last year. A Third Point spokesman declined to comment.