Ten years ago, when the hedge fund industry was much smaller than it is today, it took 25 hedge fund managers to earn a combined annual payday of $5 billion.
Last year, it took only one.
John Paulson, who rose to fame in 2007 with a prescient bet against subprime mortgages, earned a record $4.9 billion in 2010 as a result of a big wager that his fund, Paulson & Company, made on gold. The metal soared last year, lifting the values of some hedge funds by more than 30 percent.
Last year was very lucrative for some of the biggest and best-performing hedge funds’ chiefs. Wealth was so concentrated that a mere 25 people pocketed a total of $22.07 billion, according to this year’s annual ranking by AR Magazine, which tracks the hedge fund industry. At $50,000 a year, it would take the salaries of 441,400 Americans to match that sum.
Hedge fund managers can still have huge paydays even in years when their funds do not perform well. That is because of the millions they earn in fees from charging state pension funds, college endowments and wealthy individuals to manage money. These fees are typically collected regardless of whether the firm has a profit or a loss.
“So many of these guys are killing it on the management fees,” said Bradley H. Alford, chief investment officer of Alpha Capital Management, which invests in hedge funds. “You can’t feel good giving 30 percent of your returns to some guy who was up single digits. That has to give you indigestion.”
In fact, the hedge fund industry as a whole did not do better than the stock market last year. The HedgeFund Intelligence Global Composite Index, which tracks nearly 4,000 hedge funds around the world, had a median gain of 8 percent in 2010, trailing the 11.7 percent rise in the MSCI World Index of stocks and the 12.7 percent rise in the Standard & Poor’s 500-stock index.
And this year’s list of top hedge fund earners includes a number of managers who pocketed hundreds of millions of dollars in fees but produced only single-digit returns for their investors. AR Magazine arrives at the pay figures by estimating a money manager’s portion of fees along with the increase in value of personal stakes in the funds.
For instance, David Shaw of D. E. Shaw, a firm that uses complex algorithms to determine its investments, made the list with income of $275 million, even though his biggest fund returned a paltry 2.45 percent and over all the firm lost 40 percent of its assets, the magazine said.
AR Magazine said Mr. Shaw, who gave up day-to-day oversight of the funds in 2002, made the list because the firm charged a 3 percent management fee and took 30 percent of the investment gains. Mr. Shaw also has much of his own personal wealth tied up in the firm.
Other managers who collected big paychecks while their funds had mediocre returns included George Soros, who is retired but has most of his money in the $28 billion Quantum Endowment fund. The Quantum fund rose 2.63 percent last year, its worst performance since 2002.
Likewise, funds at Moore Capital Management had mostly single-digit returns, but the manager, Louis Bacon, pocketed $230 million based on the increase in value of his holdings in the funds as well as a portion of the firm’s 3 percent management fee and 25 percent performance fees, the magazine said.
To be sure, there were some managers from the 2009 list who did not make this year’s ranking because of subpar performance or even losses at their funds.
For the first time since opening Centaurus Advisors in 2002, the former Enron energy trader John Arnold had a losing year, ending down 3.27 percent. Under Alan Howard, Brevan Howard Asset Management struggled throughout 2010 and wound up with gains of 0.9 percent to 1 percent, the magazine said.
And Philip Falcone of Harbinger Capital Partners, who made $825 million in 2009 and has worried some investors with a huge bet on wireless broadband technology, did not make the list after his flagship fund tumbled 12 percent last year.
Still, there were plenty of bright spots for this year’s top earners.
Big gains late in the year helped Third Point Advisors’ Daniel Loeb make returns of 33.7 percent to 41.5 percent in his funds, giving him a payday of $210 million.
Likewise, David Tepper of Appaloosa Management, who topped the hedge fund rich list in 2009 with a payday of $4 billion, earned another $2.2 billion last year after his funds posted returns of 22 percent to nearly 28 percent, the magazine said.
And a return of 20 percent in his fund last year landed Leon Cooperman of Omega Advisors on the list for the first time since 2004.
Many of the managers on the list declined to comment or did not respond to calls seeking comment. But Mr. Cooperman was willing to discuss his history and his returns.
The son of a plumber, he attended New York City public schools in the Bronx. Mr. Cooperman earned an undergraduate degree at Hunter College at a time when it cost $24 a semester to attend, he recalled in a telephone interview.
When told he made the list with a payday of $240 million, Mr. Cooperman laughed.
“I have no idea how much I made last year. I don’t know until it’s tax time. Besides, I’m giving it all away anyway,” he said, noting that he has taken the Giving Pledge, an effort by Bill and Melinda Gates and Warren E. Buffett to prompt wealthy individuals to give away the majority of their wealth during their lifetimes or upon their deaths.
Mr. Cooperman, 67, explained that he had been giving money to several hospitals and charities, as well as Columbia, where he earned his business degree and immediately joined the ranks of Goldman Sachs after graduation.
“I’m very, very philanthropic toward Columbia, which opened the door to Wall Street for me,” said Mr. Cooperman. “I’m trying to give money away to the kinds of things that touched me during my lifetime.”