Good performance, mediocre results or even downright ugly returns. When it comes to hedge funds, it scarcely matters. Even as some investors begin to sour on these high-priced stock pickers, the top fund managers still haul in enormous paychecks.
The 25 best-paid hedge fund managers earned a collective $11 billion in 2016, according to an annual ranking published on Tuesday by Institutional Investor's Alpha magazine.
Even managers who had a tough year were able to cash in. Nearly half of the top-25 earners made single-digit returns for their investors, a lackluster sum in a year when the Standard & Poor's 500-stock index was up 12 percent, accounting for reinvested dividends.
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The top earner of 2016 was James Simons, the former code breaker for the National Security Agency and the founder of Renaissance Technologies, who made $1.6 billion. Ray Dalio, the founder of Bridgewater Associates who is best known for his philosophy of "radical transparency," came in a close second with $1.4 billion. Further down the list was Robert Mercer, the co-chief executive of Renaissance and one of the biggest backers of Donald J. Trump's presidential campaign, who earned $125 million.
But some of the best-known names in the industry — including William A. Ackman, John A. Paulson and Edward S. Lampert — failed to make the list. Also missing from the list: women.
The list is based on estimates drawn from each individual's share of their firm's management and performance fees. It also takes into consideration each manager's own capital invested in the funds.
These outsize paydays come at a turning point for the industry. For eight consecutive years, hedge funds have disappointed, underperforming a roaring stock market. In addition, some managers have lost billions of dollars through wrong-footed bets, marking what one hedge fund billionaire, Daniel S. Loeb, called a "catastrophic period" for the industry.
Some frustrated investors headed for the exits in 2016, taking with them $70 billion from the $3 trillion industry. As a result, managers shut their doors and wound down their funds at the fastest rate since the financial crisis in 2008.
Things became so tough last year that big money managers found themselves sitting at the negotiating table with their investors, offering lower fees and better terms for sharing in the returns.
"It's a moment in time where you're going to see a cleansing of the hedge fund industry," said Adam I. Taback, head of global alternative investments at Wells Fargo Investment Institute.
"The industry had a lot of money and a lot of growth all chasing the same investments," Mr. Taback said, adding that a culling was much needed for the industry to return to its roots.
Despite hedge fund managers' struggles to beat the market, their compensation has soared over the past decade. The $11 billion payday for the top-25 managers in 2016 is down from $13 billion the previous year, but still more than double what the top earners made in 2000, the first year that Institutional Investor compiled its list. It also dwarfs the sums earned by executives of public companies.
Even the lowest-ranking manager on Alpha magazine's expanded top-50 list made more money in 2016 than any big United States bank executive, including Jamie Dimon of J. P. Morgan, Lloyd Blankfein of Goldman Sachs and James Gorman of Morgan Stanley, all of who have been criticized for their big paychecks.
The key to these large paydays is the fee system known as 2-and-20. Hedge funds typically charge investors 2 percent of their investment annually, regardless of performance. So even in a disappointing year, managers still are paid a handsome sum. In the event they make a profit, the funds take 20 percent of that as well.
Not all hedge funds underperformed in 2016. At the $42 billion Renaissance, where a team of cryptographers, physicists and astronomers parse large volumes of data, the firm's two public funds, Renaissance Institutional Equities Fund and Renaissance Institutional Diversified Alpha Fund, gained 21.5 percent and 11 percent, respectively.
At Bridgewater, Mr. Dalio's $165 billion firm, the flagship fund, Pure Alpha, gained just 2.4 percent. But its newest fund, Optimal, gained 7 percent, and its All Weather fund, which charges lower fees, gained 11.6 percent.
The original allure of a hedge fund was the promise of smoother returns during market upheavals along with risk-adjusted returns that would stand out. In recent years, investors have complained that some firms failed to uphold this pledge.
"When a manager collects a fee without adding value, it's just not right," said Scott M. Stringer, the New York City comptroller. Some of the New York City pension funds have pared back their investments in hedge funds, and the comptroller's office has requested lower fees and better terms from those it continues to hold.
Mr. Paulson, who is best known for reaping a windfall by betting on a collapse of the housing market in 2008, has made $15.45 billion over the 16 years that Institutional Investor has been compiling its list. But he was bumped off the list after double-digit losses in 2016, a year that he called "the most challenging" since he founded Paulson & Company in 1994.
Mr. Lampert of ESL Investments was once heralded as a hedge fund wunderkind and has made $7.16 billion over the years. But these days his investment in the beleaguered Sears Holdings has left him with few outside investors, and he is not on this year's list.
And Mr. Ackman of Pershing Square Capital Management has had percentage losses in the double digits for two years in a row. Earlier this year, he conceded to investors that a wager on Valeant Pharmaceuticals International — the biggest in his firm's history — was a "huge mistake," and he sold the position, resulting in a remarkable $4 billion loss. Mr. Ackman is not on the list this year but came in fourth in 2014 with $950 million.
Others made the list despite posting subpar returns. Kenneth C. Griffin, the billionaire founder of Citadel and a major Republican donor, took home $600 million despite what he called "a challenging year" in which he made investors in his main flagship funds just over 5 percent. Mr. Loeb of Third Point earned $260 million, after making investors in his offshore fund just over 6 percent.
Two of the most recent high-profile hedge fund closures underscore the pressures managers face, including market swings from surprise events such as Britain's exit from the European Union and the election of President Trump.
Richard C. Perry, once among the most successful and earliest hedge fund investors, closed his flagship fund last year after steep losses, citing strong "market headwinds" that made "the timing for success in our positions too unpredictable." He has made Institutional Investor's top-50 earners list five times.
Earlier this year, Eric Mindich, the founder of Eton Park Capital Management, told investors that he was shutting down his firm because of "a combination of industry headwinds, a difficult market environment and, importantly, our own disappointing 2016 results." Mr. Mindich made the list in 2007.
While some managers may have taken a pay cut to appease investors, they still earn more each year than the average American could ever dream of earning in a lifetime. During the presidential campaign, Mr. Trump accused hedge funds of "getting away with murder" and pledged that they would be "paying up" if he became president, by closing a loophole that allowed them to pay lower taxes.
But the Trump administration's outline of a tax plan, released at the end of April, appears to be a boon for the industry. In its current form, Mr. Trump's plan eliminates the special treatment called carried interest for hedge funds, but he replaces it with a new and lower rate.