Top hedge fund managers still make billions

Top earner of 2016 is James Simons

NEW YORK: Good performance, mediocre results or even downright ugly returns. When it comes to hedge funds, it scarcely matters. Even as some investors begin to sour on these high-priced stock pickers, the top fund managers still haul in enormous paycheques.

The 25 best-paid hedge fund managers earned a collective $11 billion in 2016, according to an annual ranking published yesterday by Institutional Investor’s Alpha magazine.

Even managers who had a tough year were able to cash in. Nearly half of the top-25 earners made single-digit returns for their investors, a lacklustre sum in a year when the Standard & Poor’s 500stock index was up 12%, accounting for reinvested dividends.

The top earner of 2016 was James Simons, the former code-breaker for the National Security Agency and the founder of Renaissance Technologies, who made $1.6 billion. Ray Dalio, the founder of Bridgewater Associates who is best known for his philosophy of “radical transparency,” came in a close second with $1.4 billion.

Further down the list was Robert Mercer, the co-chief executive of Renaissance and one of the biggest backers of Donald Trump’s presidential campaign, who earned $125 million.

But some of the best-known names in the industry — including William Ackman, John Paulson and Edward Lampert — failed to make the list.

The list is based on estimates drawn from each individual’s share of their firm’s management and performance fees. It also takes into consideration each manager’s own capital invested in the funds.

These outsize paydays come at a turning point for the industry. For eight consecutive years, hedge funds have disappointed, underperforming a roaring stock market.

In addition, some managers have lost billions of dollars through wrong-footed bets, marking what one hedge fund billionaire, Daniel Loeb, called a “catastrophic period” for the industry.

Some frustrated investors headed for the exits in 2016, taking with them $70 billion from the $3 trillion industry. As a result, managers shut their doors and wound down their funds at the fastest rate since the financial crisis in 2008.

Things became so tough last year that big money managers found themselves sitting at the negotiating table with their investors, offering lower fees and better terms for sharing in the returns.

“It’s a moment in time where you’re going to see a cleansing of the hedge fund industry,” said Adam Taback, head of global alternative investments at Wells Fargo Investment Institute.

“The industry had a lot of money and a lot of growth all chasing the same investments,” he said, adding that a culling was much needed for the industry to return to its roots.

Despite hedge fund managers’ struggles to beat the market, their compensation has soared over the past decade. The $11 billion payday for the top-25 managers in 2016 is down from $13 billion last year, but still more than double what the top earners made in 2000, the first year that Institutional Investor compiled its list. It also dwarfs the sums earned by executives of public companies.

Even the lowest-ranking manager on Alpha magazine’s expanded top-50 list made more money in 2016 than any big US bank executive, including Jamie Dimon of JPMorgan Chase & Co, Lloyd Blankfein of Goldman Sachs Group Inc and James Gorman of Morgan Stanley, all of who have been criticised for their big paycheques.

The key to these large paydays is the fee system known as 2-and-20. Hedge funds typically charge investors 2% of their investment annually, regardless of performance. So even in a disappointing year, managers still are paid a handsome sum. In the event they make a profit, the funds take 20% of that as well.

Not all hedge funds underperformed in 2016. At the $42 billion Renaissance, where a team of cryptographers, physicists and astronomers parse large volumes of data, the firm’s two public funds, Renaissance Institutional Equities Fund and Renaissance Institutional Diversified Alpha Fund, gained 21.5% and 11%, respectively.

At Bridgewater, Dalio’s $165 billion firm, the flagship fund, Pure Alpha, gained just 2.4%. But its newest fund, Optimal, gained 7%, and its All Weather fund, which charges lower fees, gained 11.6%.

The original allure of a hedge fund was the promise of smoother returns during market upheavals along with risk-adjusted returns that would stand out. In recent years, investors have complained that some firms failed to uphold this pledge.

“When a manager collects a fee without adding value, it’s just not right,” said Scott Stringer, the New York City comptroller.

Some of the New York City pension funds have pared back their investments in hedge funds, and the comptroller’s office has requested lower fees and better terms from those it continues to hold.