The Rich Men Who Make Money Off You & For You

According to Alpha's Rich List, the highest earning hedge fund managers of 2013 shrewdly found opportunities in sectors and markets not widely targeted by the momentum set.
By Larissa Fernand |  12-05-14 | 
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Larissa Fernand is Senior Editor at Follow her on Twitter @larissafernand

A few days ago, Institutional Investor’s Alpha came out with the Rich List, which lists the 25 highest-earning hedge fund managers of the past year.

Once again, crowing loudly on top of the pecking order is David Tepper. He bulldozed his way to the top of 2013’s list with a haul of $2.2 billion by way of earnings. This time, he went many steps ahead and raked in $3.5 billion, putting a yawning gap between him and No. 2.

Tepper made news a few years ago when he bought an ocean-front mansion in The Hamptons for $43.5 million and then tore it down so that he could reconstruct another. He was allegedly irked that he could not see the ocean from every room of the 6,165 square foot estate. So why not do something about it?

Steven Cohen followed with earnings of $2.4 billion. Cohen’s paycheck funds his art craze. Last year he plunked down a cool $155 million for Picasso’s “Le Rêve” and before that it was $120 million for four bronze sculptures of a woman’s back, created by Henri Matisse over 23 years.

Though Cohen might be happy that he moved up the ladder from third position last year to second position this year, he won’t be featuring in this list next year. According to Institutional Investor’s Alpha, his multi-strategy fund gained 20.5% last year but his firm returned all client money as part of a government settlement of criminal insider trading charges. According to CNN, a federal judge approved a $1.8 billion settlement from the firm, which is inclusive of the earlier $616 million penalty. SAC Capital Advisors, the firm founded by Steven Cohen, has been renamed Point72 Asset Management and now operates as a family office, trading only on behalf of Cohen, his family and his employees.

Raymond Dalio has slipped ungraciously down the ladder. From the numero uno slot in 2012’s list ($3.9 billion), he was relegated to the second slot last year ($1.7 billion). This time around he managed a mere $600 million and found himself at the tenth slot. Ouch!

James Simmons has stayed at No. 4 though his earnings have jumped. This year it was $2.2 billion, up from $1.1 billion last year. Only managers, principals or other employees of firms that manage money for outside clients are eligible for the Rich List, which tabulates a person’s share of the management and performance fees as well as the gains on his own capital. Hence those with sizable fortunes – even people who are no longer managing money on a day-to-day basis, - can qualify for the ranking based simply on gains on their own capital invested in their own funds. That is one reason Renaissance Technologies founder Simmons, who has not managed that firm’s funds for several years features on the list. Incidentally, Simmons is the only individual to qualify for the list in all the 13 years of its existence.

The pay structure of the hedge fund industry is absolutely seductive. The final size of the paychecks are based on the value of the managers’ stakes in their hedge funds and the fees they charge. Though exact figures vary between funds, the standard fee arrangement that investors pay a hedge fund is “2 and 20”, which means 2% of the assets under management and 20% of profits above a predetermined benchmark, like the London Interbank Offer Rate (Libor).

Let’s say a hedgie manages $80 billion in assets. That would translate into an eye-popping $1.6 billion simply for switching on his computer and putting his legs on the table. Even if he had a crappy year and failed to stumble across any alpha, he need not go easy on his caviar and champagne. After all he is skimming off 2% by way of management fees.

According to the Alpha’s Rich List, the 25 individuals of the world’s top-earning hedge fund managers raked in more than $21 billion last year. That’s roughly 50% more than the 25 best-paid managers reaped in each of the previous two years. Here are the top of 2013's list.

  1. David Tepper: $3.5 billion
  2. Steven Cohen: $2.4 billion
  3. John Paulson: $2.3 billion
  4. James Simons: $2.2 billion
  5. Kenneth Griffin: $950 million
  6. Israel Englander: $850 million
  7. Leon Cooperman: $825 million
  8. Lawrence Robbins: $750 million
  9. Daniel Loeb: $700 million
  10. At $600 million each, Raymond Dalio and Paul Tudor Jones II bag this slot
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