Where is the money and power on Wall Street? A new survey reports that it is firmly in the hands of those who run hedge funds.
How about an annual payday of $1.5 billion? According to a survey by Alpha, a magazine published by the highly watched Institutional Investor, that's just what James Simons, founder of Renaissance Technologies, made in 2005. His flagship Medallion Fund, with $5.3 billion invested, returned 29.5 percent, net of fees.
Hedge funds are lightly regulated funds that attract billions of dollars from institutions and millionaire private investors. Those funds favor nontraditional investments: They short stocks, put money into commodities and play currency markets. And until recently, the payoff has been huge.
According to Alpha, to make the list of top 25 hedge fund earners last year, hedge fund managers had to "take home" at least $130 million. Because of a tie, there were 26 hedge fund managers who made $130 million or more.
No. 2 on Alpha's list after Simons is the venerable T. Boone Pickens, the 78-year-old oilman. His 2005 earnings: $1.4 billion. No. 3 was legendary fund manager George Soros at $840 million.
Double-Digit Returns Boost Earnings
Alpha's ranking was based on estimates of the traditional fee structure by hedge fund managers. That structure historically has been to charge 2 percent of money under management and 20 percent of the fund's performance. But in recent years, the performance fees have often been double their traditional level. Given huge returns, it's hard to find an investor who complains.
Alpha says the average pay for the top 26 hedge fund managers is $363 million. And that pay has increased dramatically over the last few years. In 2002, for example, entry to Alpha's top 25 list required a paltry $30 million. By 2004, that had reached $100 million. In 2005, as mentioned, it was $130 million.
The big paydays are the result of years of double-digit returns for investors.
"What it shows is clearly a shift in power on Wall Street," says Michael Peltz, an editor at Alpha. "The best investors say this is where to play the game."
Big Money, Bigger Clout
And in the only language Wall Street understands, it's where the money is going.
"Activity in the market is more and more driven by hedge funds," Peltz adds, "even though they don't have as big a stake in companies as traditional investors."
But they do have influence for change -- or no change -- in some of the world's biggest financial institutions.
Atticus Capital was among the hedge funds that successfully opposed Deutsche Borse's attempted $2.5 billion takeover of the London Stock Exchange. Atticus' campaign led to management changes at Deutsche Borse.
Peltz says that shows the influence of hedge funds beyond their stake in an individual company.
Atticus' founder, Timothy Barakett, by the way, made $200 million in 2005, below the average of the top 25 fund managers but still a nice piece of change.
Despite the jaw-dropping salary figures, Alpha says that money is actually not a paycheck. It remains as part of a hedge fund's capital. And many top hedge funds in 2006 have seen their returns slip to single digits.
Joseph C. Bogle, who founded Vanguard Group, said that should embarrass fund managers. "I guess people don't get embarrassed," says Bogle, "when it comes to money.