The Rich List: The Highest-Earning Hedge Fund Managers of the Past Year

May 06, 2014   Stephen Taub

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Despite appearances to the contrary, 2013 was not a great year to be a hedge fund manager. Sure, the U.S. stock market surged 30 percent, but much of that gain was driven by hot momentum stocks in the Internet, technology, media and health care sectors - precisely the type of securities that many hedge fund managers like to sell short because the underlying fundamentals often don't back up their inflated valuations.

As a result, some managers - especially the so-called Tiger Cubs, who started their careers at Julian Robertson Jr.'s famed Tiger Management Corp. - racked up gains of 40 to 50 percent on the long side but took a beating on the short side, leading them to post returns well below the market averages in their long-short funds. So it took more than simply riding the stock market for hedge fund managers to earn an outsize haul in 2013. A number of the managers who excelled last year - and therefore top Alpha's 13th annual Rich List ranking of the hedge fund industry's 25 highest earners - shrewdly found opportunities in sectors and markets that were not widely targeted by the momentum set.

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Take David Tepper, the founder of Appaloosa Management. Tepper, who brought home $3.5 billion in 2013, got his start investing in junk bonds and is best known as a distressed investor. But over the past few years, Tepper has become famous for making huge bets on specific sectors in the equity markets precisely when they're at their most unfashionable. Last year he posted gains of roughly 42 percent in his two main funds - Appaloosa I and Palomino - by loading up on out-of-favor airlines such as American Airlines Group, Delta Air Lines and United Continental Holdings. He also astutely cashed in on financials and auto-related stocks as well as asset-backed securities. This is the second consecutive year Tepper has topped the Rich List and the third time in five years.

Paulson & Co.'s John Paulson ranked third with $2.3 billion also by mostly avoiding the hottest stocks. Paulson enjoyed huge gains from identifying consolidating industries, including telecommunications, health care and biotechnology. The firm correctly anticipated that Sprint Nextel would be acquired, and it generated triple-digit gains from investments in T-Mobile US and Leap Wireless International. It also cashed in when Life Technologies agreed to be acquired by Thermo Fisher Scientific.

The 25 top earners of 2013 raked in a total of $21.15 billion. That's roughly 50 percent more than the 25 best-paid managers reaped in each of the previous two years. Four managers earned more than $1 billion, while a fifth just missed that distinction. To qualify for the list, a manager needed to have earned at least $300 million in 2013, or 50 percent more than the 2013 cutoff.

These hedge fund executives may have handily beaten their take-home total for the previous year, but 2013 was hardly the most profitable year for the highest-earning managers as a group. The total earnings for the top 25 are only the fourth highest in 13 years, while their average combined earnings of $846 million are just the fifth-best showing. 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.

That last factor explains why some managers landed on the list even though their firms did not generate big investment returns. 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's one reason Renaissance Technologies founder James Simons, who has not managed that firm's funds for several years, ranked fourth after earning $2.2 billion. Simons is the only person to qualify for the list in all 13 years.

Of course, some managers did make the Rich List by going long and short the most popular momentum stocks, posting returns in the high teens and low 20 percent range. But none of them cracked the top half of the ranking. Rather, they benefited heavily from the size of their firms and the huge personal stakes they had invested in their funds.

This year 20 managers who made last year's list are returning. Of the five who fell off, one retired at the end of 2012: Farallon Capital Management's Thomas Steyer. Three of the other four made an amount in 2013 that would have qualified them for the cutoff last year but relegated them to the Second Team of top-earning managers this year (see page 27). Three individuals make their debut this year: Greenlight Capital's David Einhorn, Highfields Capital Management's Jonathon Jacobson and Trian Partners' Nelson Peltz.

One Rich List giant is making his final appearance. SAC Capital Advisors founder Steven Cohen ranks second this year, with $2.4 billion in earnings. Last year his multistrategy hedge fund gained 20.5 percent, but his firm agreed to return all client money as part of a government settlement of criminal insider trading charges. SAC, since renamed Point72 Asset Management, now operates as a family office, trading only on behalf of Cohen, his family and his employees.

 

 
Rank Name Firm Earnings
1 David Tepper Appaloosa Management $3.5 billion
2 Steven Cohen SAC Capital Advisors $2.4 billion
3 John Paulson Paulson & Co. $2.3 billion
4 James Simons Renaissance Technologies $2.2 billion
5 Kenneth Griffin Citadel $950 million
6 Israel (Izzy) Englander Millennium Management $850 million
7 Leon Cooperman Omega Advisors $825 million
8 Lawrence Robbins Glenview Capital Management $750 million
9 Daniel Loeb Third Point $700 million
10 Raymond Dalio Bridgewater Associates $600 million
10 Paul Tudor Jones II Tudor Investment Corp. $600 million
Click to view the full ranking of the top 25 money earners



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