Hedge fund managers heavily populate the so-called 1 percent in the United States. And they are getting richer.
The 25 highest-earning hedge fund managers in the United States took home a total of $21.15 billion in compensation in 2013, according to an annual ranking published on Tuesday by Institutional Investor's Alpha magazine.
They earned that hefty sum in a year when most hedge fund managers fell short of the market's returns. The multibillion-dollar payday is the highest since 2010, and it is 50 percent more than in 2012, according to the survey.
David A. Tepper, the 56-year-old founder of Appaloosa Management, maintained his spot atop the list, bringing in $3.5 billion last year, after earning $2.2 billion in 2012. Steven A. Cohen of SAC Capital Advisors ranked No. 2 after pocketing $2.4 billion, while John A. Paulson of Paulson & Company took home $2.3 billion, ranking No. 3.
The size of these paychecks are estimates based on the value of the managers' stakes in their hedge funds and the fees they charge. Investors typically pay management fees of 2 percent of the total assets under management and 20 percent of the profits, or "2 and 20."
Mr. Tepper returned 42 percent to investors in his flagship Appaloosa Investment I and Palomino funds, partly driven by big bets on formerly down-and-out airline stocks like Delta Air Lines and American Airlines, as well as financial and auto stocks.
While the fees they pay can vary, investors in Appaloosa typically follow the "2 and 20" pattern. A representative for Mr. Tepper declined to comment.
Mr. Paulson, who made his name betting against the housing market, generated returns of 63 percent in his Paulson Recovery fund after betting on the housing recovery and on unloved financial services stocks. His merger fund also made strong gains from smart wagers on deals in the telecommunications, biotechnology and health care sectors.
Paulson & Company takes a 1.5 percent management fee and 20 percent performance fee. A spokeswoman for Mr. Paulson declined to comment.
Mr. Cohen returned 20.1 percent to investors in his multibillion-dollar SAC Capital Advisors, and his paycheck was lifted by the 50 percent fee he charged them. He has been near the top of the rankings for all but one year of Institutional Investor's survey, which has been compiled since 2002.
But it will most likely be Mr. Cohen's last time on the list, which tracks managers who invest outside money. As part of an agreement with the government last year to plead guilty to securities fraud violations and pay a record $1.2 billion penalty, SAC agreed to close its doors to outside investors and manage only Mr. Cohen's personal wealth. The firm has since changed its name to Point72 Asset Management.
A spokesman for Mr. Cohen declined to comment.
More remarkable than the size of the paychecks in 2013 were the multiples by which they have ballooned since Institutional Investor began collecting data on pay. During that period, the $2.7 trillion hedge fund industry has sought billions of dollars from the rich and from pension funds and endowments.
George Soros, the investor whose $1 billion bet against the British pound is said to have broken the Bank of England in 1992, was the biggest earner in the survey's inaugural year, with $700 million in earnings, one-fifth of Mr. Tepper's paycheck in 2013.
Daring bets that bring investors huge gains have helped justify the high terms, but lackluster returns in recent years have drawn criticism from many in the investing community.
For most hedge fund clients, 2013 was disappointing. It was the fifth consecutive year that hedge funds fell short of stock market performance, with the average fund returning 9.1 percent, according to a composite index of 2,200 portfolios collected by HFR, a firm that tracks the industry.
By comparison, the Standard & Poor's 500-stock index soared 32.4 percent after accounting for dividends.
Some hedge fund titans took home large sums of money even as their investors were left with little to show, in large part because of the sheer size of the assets under management and the fees they charge.
Raymond Dalio, the 64-year-old founder of the world's biggest hedge fund, Bridgewater Associates, earned $600 million. His funds gave investors returns of 3.5 percent to 5.3 percent. Mr. Dalio, whose views on the economy are closely watched, is alsoknown for his 123-page Bridgewater manifesto called "Principles," which espouses a Darwinian capitalism reminiscent of the works of Ayn Rand.
Mr. Dalio's spokeswoman declined to comment.
As technology stocks soared in 2013, one cluster of hedge funds called the Tiger Cubs and their founders reaped generous payouts. Named after the hedge fund giant Tiger Management, these firms are run by former protégés of its founder, Julian H. Robertson Jr. They include Robert Citrone, an ex-wrestler and founder of Discovery Capital Management, who made $475 million; John Griffin of Blue Ridge Capital, who brought in $470 million; O. Andreas Halvorsen of Viking Global Investors, who earned $450 million; and Stephen F. Mandel Jr. of Lone Pine Capital, who pulled in $450 million.
But 2014 may not turn out to be as flush for some hedge fund managers. Since the start of the year, many of them have been dragged down by a market rout in the technology and biotechnology sectors.
Activist investors who buy stakes in companies to shake up management and change the business had a great 2013, as investors poured record levels of money into their funds.
Larry Robbins took home $750 million, and his firm, Glenview Capital Management, had the best returns of any hedge fund in the top 25. Mr. Robbins, who is not normally an activist investor and prefers to be called a "suggestivist," led a successful proxy battle against Health Management Associates, providing a boon to investors. He also made big bets on health care companies like McKesson, HCA Holdings and Life Technologies. His flagship Glenview Capital fund gained 44.3 percent in 2013, while the Glenview Opportunity fund rose 101.7 percent.
A spokesman declined to comment.
Daniel S. Loeb, the acerbic activist who is best known for his tactic of wielding a poison pen at senior executives, made $700 million in 2013, and his Third Point hedge fund posted gains of 26 percent. On Monday, the target of one of Mr. Loeb's proxy battles, Sotheby's, announced it had reached an agreement with Mr. Loeb just one day ahead of what was poised to be a dramatic annual meeting.
Nelson Peltz, a co-founder of Trian Partners, reaped $375 million. The firm's most successful bets were on Wendy's, the manufacturer Ingersoll-Rand and Mondelez International, the owner of brands like Cadbury and Ritz. Trian Partners grew by $3.5 billion last year.
Spokeswomen for Mr. Loeb and Mr. Peltz declined to comment.
James G. Dinan, the founder of York Capital, a hedge fund that has often bought stakes in companies that are later singled out by activists but that typically stays on the sidelines, received $360 million in 2013. A spokeswoman for Mr. Dinan declined to comment.
With historic amounts of money flooding into the industry — investors put $63.7 billion into hedge funds last year alone — there will be no shortage of newly minted hedge fund millionaires and billionaires to come.
But for this list, all the highest earners were men. No women placed among the top 50.
—By Alexandra Stevenson of The New York Times