The top hedge fund managers took home dizzying sums last year, fed by a bull market in commodities and investors' willingness to pay handsomely for proven track records.
Institutional Investor's Alpha reported Wednesday the top 50 hedge fund managers earned a combined $29 billion in 2007. Five earned more than $1 billion each.
One reason for the enormous amounts hedge fund managers are making is the unraveling of the traditional "2 and 20" method of compensation. For years, funds typically charged 2% of the amount invested plus 20% of the profits.
Ezra Zask of Lakeville Capital Management, a hedge fund advisory, says some of the bigger hedge funds now charge as much as 5% of the invested principal and 40% of the profits because some investors are willing to pay higher fees to fund managers if they can show that they have consistently beaten the market.
Also, the growth of the biggest hedge funds has led to higher fees simply because the managers are charging rates on a higher principal.
Mushrooming prices for commodities such as oil, gold and wheat — which some hedge funds placed bets on — helped fuel profits. The effect of "leverage," or using borrowed money, further magnified profits at many funds.
One manager — John Paulson of Paulson & Co. — earned $3.7 billion last year, which management consultant Peter Cohan pointed out means Paulson in 2007 made in one hour 30 times what the median family made all year.
Driven in part by fees hedge fund managers are making, income inequality in 2007 was at the highest level since 1928, the year before the Great Depression began.
In fact, even among hedge funds the disparity has widened, Cohan said: The top 50 managers make a disproportionate share of the fees earned in an industry that by some accounts has 10,000 funds.
However, other top earners from the Alpha list have been known for their charitable giving:
•George Soros — who Alpha said was the second-highest-paid hedge fund manager last year at $2.9 billion — has spent $6 billion on philanthropic activities ranging from fighting poverty in Africa to funding universities in Russia.
•James Simons, who took home $2.8 billion as manager of Renaissance Technologies in 2007, co-founded the Simons Foundation, which finances education and health projects.