Click here to view the entire 2002 Hedge Fund 100 ranking results available in the Research & Rankings section of this site. Hedge fund managers are redefining what it means to be rich in finance. Our first-ever survey of the industry's top earners reveals that no fewer than 11 made more than $100 million in last year's miserable markets. The rich are different from you and me. They run hedge funds. Care to know why? Let's go where it matters most on Wall Street - to the numbers. In 2001, a year in which the Standard & Poor's 500 index fell by 13 percent and burned investors raised a hue and cry that brought a raft of state and federal subpoenas, no fewer than 11 hedge fund managers earned more than $100 million. Leading our first-ever list of the top hedge fund earners is the ever-voluble George Soros, who took home at least $700 million - and he's semiretired. Soros had some pretty flush company, according to our calculations: Caxton Corp.'s Bruce Kovner, ESL Investments' Edward Lampert and SAC Capital Advisors' Steven Cohen all earned more than $400 million. And you wonder why so many hedge funds - 6,000 today, or three times more than existed a decade ago - are being started nowadays? Simply put, hedge fund managers are redefining wealth on Wall Street. By comparison, investment bankers, even those who still have jobs, are paupers. Last year Goldman, Sachs & Co.'s Henry Paulson Jr. took home $12.2 million, Merrill Lynch & Co.'s David Komansky earned $12 million, and Morgan Stanley's Philip Purcell made $12.8 million. None of these high-powered CEOs, who run vast global enterprises, would have made our list. Successful hedge fund managers, of course, have always done rather nicely, thank you. Soros supposedly reaped a cool $1 billion from shorting the British pound in 1992. But since 1998, as hedge fund assets have soared and the number of funds themselves have proliferated, more and more managers have begun to enjoy mind-boggling paydays. In one sense, the money is well deserved. The great selling points for hedge funds are diversification and the ability of top managers to produce consistent returns that are uncorrelated to the markets - in good times and bad. And many of the managers, like Lampert, whose gross returns touched 66 percent in 2001, had outstanding years. But these star managers' incomes also pile up in a hurry, thanks to the bounties of hedge fund math, the sweetest thing to hit finance since compound interest. Hedge funders make their money through a combination of management fees and performance incentives, as well as from the increase in their own capital, which most simply plow back into their funds. The standard management fee is 1 percent. But managers command 20 percent - and sometimes much more - of a fund's gains as their performance fee. To enroll in SAC Capital Advisors' flagship fund, investors pay Cohen perhaps the highest incentive fee in the industry: 50 percent of gross annual performance. And yet investors are clamoring to get into the fund, which had a 60 percent return last year: Thanks to his fee structure, Cohen took half of that, leaving investors to net 30 percent on their money. So the more money a hedge fund manager runs and the better he performs, the richer he (and, yes, it's virtually all men) grows. Our formula for determining the most handsomely compensated managers is based on knowledgeable estimates of their share of management and performance fees and also includes (where available) our calculations of the gains on their own investments in their funds. Thus Cohen's $428 million windfall includes the return on the nearly $1 billion or so of his own capital that we estimate is invested in SAC Capital's funds. In all cases, we chose the most conservative of estimates; the earnings we show in the following pages reflect the minimum these managers are likely to have made in 2001. Hedge funds aren't just enriching their managers, of course. Wealthy investors, as well as pension funds and foundations, have reaped great benefits from entrusting their money to the individuals who appear on our list. From 1996 to 2000, for instance, Lee Ainslie III's Maverick Capital had an average annualized return of 27.68 percent, compared with 18.33 percent over the same period for the S&P 500. His 5.2 percent return last year was still impressive, given that the S&P 500 was down 13 percent. Tudor Investment Corp., run by veteran manager Paul Tudor Jones II, contributed the most names to the list: Jones himself, James Pallotta, who heads up the firm's U.S. equities investments, and Dwight Anderson, who runs Tudor's Ospraie Funds. This trio raked in at least $170 million. Julian Robertson's now defunct Tiger Management Corp., however, sired the most names on the list. Seven of the 30 we profile once worked for the firm: Ainslie, Anderson, Blue Ridge Capital's John Griffin, Viking Capital's O. Andreas Halvorsen, Joho Capital's Robert Karr, Lone Pine Capital's Stephen Mandel Jr. and Intrepid Capital Management's Steven Shapiro. "I'm very proud of what they have accomplished," says Robertson of his professional progeny. "Our selection process was pretty good. They would have done well wherever they worked." He adds that it was no coincidence that Tiger-trained hedge fund managers were among the most successful last year. "We had a real, true hedge fund mentality," he says. "You couldn't do well [last year] without hedging techniques." But the truth is that all sorts of strategies scored big. Day trader Cohen plays in nearly every market and style, except merger and interest rate arbitrage; Caxton's Kovner cashed in on last year's rate cuts; Renaissance Technologies Corp.'s James Simons used abstruse mathematical models to exploit inefficiencies in several markets, gaining 33 percent net of fees for his Medallion fund and earning himself at least $200 million; and Highbridge Capital Management's Glenn Dubin and Henry Swieca made $45 million apiece thanks to the surging convertible securities market. Whatever their style, most of these hedge fund managers, who love what they do, would likely agree with William Hamilton's cartoon character in The New Yorker who explained: "The point is to get so much money that money's not the point anymore." $700 MILLION
June 21, 2002
