By Stephen Taub
Call it the year of the management fee. In 2011 no fewer than 11 individuals garnered a spot on AR’s 11th annual Rich List ranking of the 25 top-earning hedge fund managers despite delivering only single-digit investment gains in their funds for the year. They can thank their firms’ sizable coffers: Although these managers couldn’t bank much from the 20 percent-plus performance fees for which hedge funds are famous, they found that management fees — originally designed to cover basic operating costs — have become a major profit center as firms’ assets have grown significantly larger.
Altogether the 25 highest-earning hedge fund managers earned a combined $14.4 billion last year, down from more than $22 billion in 2010 and the lowest sum in three years. The median earner made $235 million, down from $400 million in 2010 and $500 million in 2009, while the average earner reaped $576 million, down from $883 million in 2010 and nearly half the $1.1 billion average in 2009. Still, the total rose 24 percent from 2008.
The managers at the very top of this year’s Rich List bucked the trend of lackluster performance. Seven of the eight highest earners steered their respective hedge funds to double-digit net gains, while all eight generated double-digit gross returns — an impressive accomplishment given that the average hedge fund lost more than 2 percent last year, according to the HedgeFund Intelligence Composite Index.
Bridgewater Associates founder Raymond Dalio tops this year’s list with a $3.9 billion payday for 2011. Bridgewater is now the largest hedge fund in the world, with some $70 billion in hedge fund assets under management (and $120 billion in total assets). In the past two years, the 63-year-old Dalio has made $7 billion.
Dalio was not the only hedge fund manager to rack up spectacular gains in the market last year. Carl Icahn, the second--highest earner, brought home $2.5 billion from aggressive activist battles with companies such as natural-gas producer El Paso Corp. Renaissance Technologies Corp. founder and nonexecutive chairman James Simons earned $2.1 billion after his two largest funds earned mid-30 percent returns. Tiger Global Management’s Chase Coleman rode the boom in Internet stocks to a 45 percent net return; the $550 million he made won him the No. 6 position on the list.
But many others posted gains in the low single digits. That explains why a manager needed to earn only $100 million to qualify for this year’s Rich List — the lowest minimum in four years. Of those managers who made the list thanks to management fees, most also have a large sum of their own money invested in their funds; this combination of gains from their own capital on a modest return plus their share of the fees was enough to put them on the list. Those who qualified in this manner include SAC Capital Advisors’ Steven Cohen, who made $585 million even though his main fund was up just 8 percent net of fees; Viking Global Investors co--founder O. Andreas Halvorsen, who earned $300 million despite the fact that his flagship fund was up 7.6 percent; and Tudor Investment Corp.’s Paul Tudor Jones II, who earned $175 million after his main fund, Tudor BVI Global, gained less than 3 percent.
This year’s list also features eight newcomers: Greg Jensen and Robert Prince of Bridgewater, Peter Brown and Robert Mercer of Renaissance, Elliott Management Corp.’s Paul Singer, Jeffrey Ubben of ValueAct Capital, Coatue Management’s Philippe Laffont and Boaz Weinstein of Saba Capital Management. These managers proved that even in extremely difficult market conditions, it was still possible to deliver outsize returns.
Fifteen individuals who were on the 2010 Rich List failed to qualify this year. They include George Soros, who returned outside capital in 2011; Caxton Associates founder Bruce Kovner, who just missed making the list, having earned close to $100 million; and John Paulson — the top hedge fund money earner one year ago after making a Rich List record of $4.9 billion in 2010.
1 Raymond Dalio
What do you get when the founder of the world’s largest hedge fund firm racks up one of the year’s best returns? The highest-earning hedge fund manager. Ray Dalio’s Bridgewater Associates, which began 2011 with nearly $59 billion in hedge fund assets and finished with about $70 billion — for a total $120 billion in assets — posted a 16.05 percent return for Pure Alpha, its largest hedge fund. Thanks to gains on his substantial personal capital in Bridgewater’s funds and his share of the hefty fees, Dalio, 63, earned about $3.9 billion last year. That’s nearly ten times the $400 million he made in 2009, when Pure Alpha was up just 2 percent.
||Raymond Dalio (Illustration by David M. Brinley) |
In 2011, Westport, Connecticut–based Bridgewater was said to benefit mostly from investments in U.S. Treasuries; it was shrewdly bearish on the U.S. economy early in the year and participated in the subsequent rally in Treasury prices, German bonds and the Japanese yen. This year Bridgewater is looking for gold to rise, figuring several countries will intentionally inflate their money supplies to help reduce debt. Bridgewater is also looking for strength in emerging-markets currencies and lower yields in what it deems to be high-quality government bond markets, according to reports.
Dalio attributes Bridgewater’s controversial corporate culture, which encourages blunt honesty among all employees, for a big part of the firm’s success, even though it has received a fair amount of criticism. Bridgewater has made about $50 billion for its investors since Dalio founded it in 1975 from his two-bedroom New York apartment.
2 Carl Icahn
ICAHN CAPITAL MANAGEMENT
Carl Icahn’s activism paid off big-time in 2011. While more than half of all hedge funds were in the red, the 76-year-old onetime corporate raider racked up a 34.5 percent gross return. As a result, he personally earned $2.5 billion even though he returned all money to his outside investors last April. Icahn generated nearly half of his gains in the fourth quarter, led by natural--gas company El Paso Corp., which agreed to be acquired by Kinder Morgan some three months after Icahn began building his position. His other big winners: biotech company Biogen Idec, communications companies Motorola Mobility Holdings and Motorola Solutions, and Chesapeake Energy Corp. In a recent regulatory filing, Icahn calculated that over the past few years his actions have boosted aggregate market value by more than $55 billion for shareholders at well over a dozen companies he’s targeted. Last year, when he announced his plan to return all outside investor money by April 2011, Icahn stressed that he was not predicting a big drop in the market. However, he did not want to experience another year like 2008, when his fund lost 35 percent and he did not restrict investors from pulling their money. “Given the rapid market run-up over the past two years and our ongoing concerns about the economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis,” he wrote. At the time, fee-paying assets represented one quarter of the roughly $7 billion Icahn managed in the funds.
3 James Simons
RENAISSANCE TECHNOLOGIES CORP.
Talk about rising from the dead. In 2009 the Renaissance Institutional Equities Fund had lost money for two straight years, and the co-CEOs of Renaissance Technologies Corp., which manages the fund, threatened to shut it down. Wisely, they didn’t. Last year RIEF surged about 34 percent. The huge gains in RIEF and the firm’s Medallion funds enabled Renaissance founder James Simons, 73, to rake in more than $2 billion last year, mostly from returns on his own money, even though he officially retired in 2010. Simons, an award-winning mathematician, still serves as nonexecutive chairman of the $20 billion East Setauket, New York–based hedge fund firm.
||James Simons (Illustration by Agata Nowicka) |
RIEF pursues a net-long investment strategy, going roughly 150 percent long and 50 percent short, trading U.S. and non-U.S. equity securities listed on U.S. exchanges. Renaissance’s legendary Medallion strategy, which was up about 35 percent last year, employs a short-term quantitative trading strategy and has been closed to outside investors for many years.
On March 1 the firm launched a new vehicle, the Renaissance Institutional Diversified Alpha Fund, which will trade stocks listed on U.S. exchanges as well as futures and forwards. Renaissance also has a little-known fund of funds called Kaleidoscope that invests in the firm’s other funds.
A noted philanthropist, Simons, along with his wife, Marilyn, donated $150 million late last year to Stony Brook University — one of the largest gifts ever made to any institution of public higher education. Simons is a former chairman of the school’s math department; his wife, who has a Ph.D. economics, is an alumna of the university.
4 Kenneth Griffin
It took nearly three years, but Citadel founder Kenneth Griffin can finally say that he and his funds are above water. The firm’s multistrategy funds Kensington Global Strategies and Wellington — which account for the bulk of the Chicago-based firm’s $11 billion in assets — netted gains of more than 20 percent in 2011, overcoming the 55 percent they lost in 2008. (The fact that the funds are back above their high-water mark means that Citadel can start charging performance fees again.)
This strong showing placed Griffin, 43, among the top performers as well as the highest earners last year. Although Kensington and Wellington were profitable across all strategies, they were said to have done especially well in equities, energy and convertibles. In addition, the Citadel Global Equities Fund was up more than 21 percent in 2011. In a recent letter to clients, Griffin boasted that his Global Equities team had posted its tenth consecutive year of profitability.
Griffin famously launched his career trading convertible bonds from his dorm room in Cabot House at Harvard College, graduating in 1989 with a BA in economics. He launched Citadel the following year. Griffin and his wife, Anne Dias-Griffin, who runs hedge fund Aragon Global Management, are ramping up their spending on political candidates and the Republican Party. In the third quarter of 2011 alone, they gave $300,000 to American Crossroads, a political action committee that seeks to defeat President Obama.
5 Steven Cohen
SAC CAPITAL ADVISORS
SAC Capital Advisors founder Steven Cohen, 55, is known as the consummate trader, delivering double--digit returns for the better part of two decades. Although last year’s 8 percent net return by SAC’s flagship multistrategy fund was among Cohen’s worst annual results, apart from its 19 percent loss in 2008, the fund’s gross return of 16 percent was easily among the best hedge fund performances of 2011. The fund, which charges a whopping 50 percent performance fee, did especially well in discretionary long-short equity, earning most of its gains from the energy, retail and technology sectors.
Cohen, whose firm operates out of plush offices in Stamford, Connecticut, decorated with works from his vast collection of contemporary art, has a proclivity for making headlines. He is in the running to buy the Los Angeles Dodgers baseball team and is rumored to be plunking down $20 million to purchase a small piece of the New York Mets as a hedge in case he loses out on the Dodgers.
But Cohen garnered embarrassing publicity from the federal government’s wide-ranging, ongoing investigation of insider trading activities: No fewer than seven former SAC employees ran afoul of regulators. Two of them pled guilty to criminal charges, in part for actions that took place while they worked at SAC; the rest settled civil claims made by the Securities and Exchange Commission.
Earlier this year two other former SAC employees were arrested — Anthony Chiasson, who co-founded Level Global in 2003 with SAC alum David Ganek — and Jon Horvath of SAC affiliate Sigma Capital Management. Neither Cohen nor SAC has been accused of any wrongdoing.
Next: Top Earners 6-25