Friday, May 27, 2005
Alpha's Top 25 best-paid hedge fund managers
by Stephen Taub
Institutional Investor.com
[Below is an excerpt from Alpha magazine's Rich List featuring the 25 best-paid hedge fund managers. To view the full article and the entire issue of Alpha magazine, including the Hedge Fund 100, click here to subscribe.]
To make the list of the best-paid hedge fund managers, you had to make $100 million — and that was in a so-so year.
Trying to impress New Yorkers with money is like trying to impress Muscovites with snow: The stuff is just too commonplace. Yet never before in the annals of wealth and power in Manhattan has there been an upswelling of plutocracy quite like the ascendancy of hedge fund managers. Even the most blasé Gothamites are taking note.
But then, never before have so few made so much so fast. Just to appear on Alpha's 2005 list of the top 25 hedge fund earners required $100 million. To come out No. 1 took an astonishing $1 billion, a distinction earned by Edward Lampert of ESL Investments. In all, the 25 hedge fund managers on our rich list reaped an average of $251 million from fees and from gains on their investments in their funds. By comparison, the CEO of a typical top 500 U.S. corporation hauled in a measly $10 million last year. That $251 million, by the way, stacks up nicely against the comparable figure for the hedge fund managers on the 2004 rich list: $207 million. Or that for the year before: $110 million.
Now, like the really rich before them, hedge fund managers are asserting themselves beyond the business sphere: in the arts, in politics and in society. And they are reshaping the upper end of the markets in two commodities that ultra-affluent New Yorkers cherish: fine art and luxury real estate. "Hedge fund managers are absolutely the reason the art market is soaring," says Milton Esterow, editor and publisher of ARTnews. Allan Schwartzman, an adviser to private collectors and museums, calls hedge fund managers "voracious" collectors.
Steven Cohen of SAC Capital Advisors (whose earnings of $450 million put him at No. 4 on our top 25 list) has rapidly assembled a serious collection of contemporary and modern art. He reportedly paid $52 million for a Jackson Pollock, $20 million for a Manet and $25 million for a Warhol. Cohen also shelled out $8 million for Damien Hirst's Physical Impossibility of Death in the Mind of Someone Living, a 14-foot tiger shark entombed in formaldehyde. ARTnews has named Cohen one of the world's top ten art collectors for the third straight year.
Kenneth Griffin of Citadel Investment Group (No. 8 on our list, with $240 million) made the ARTnews ranking for the first time last year, after plunking down an undisclosed sum for a Cézanne still life, Curtain, Jug and Fruit Bowl; it sold for $60.5 million in 1999. At least eight hedge fund managers were among the magazine's 200 top art collectors in 2004.
Of course, important art demands an appropriate showcase. Cohen is said to be forking over $24 million for two apartments at One Beacon Court in midtown Manhattan so that he can create a duplex pied-à-terre on the upper floors. (His main residence is in Greenwich, Connecticut.) No word yet on whether the shark is going up- or downstairs.
Collecting property can be almost as gratifying for hedge fund tycoons, apparently, as buying paintings or large fish. "Hedge funds have had a big effect on the real estate market," reports Barbara Corcoran, chairwoman of New York–based real estate firm Corcoran Group. "The very top tier has been changed by hedge funds."
To offer another example in the eight-digit domain (anything less is ho-hum): York Capital Management's James Dinan (whose $125 million in earnings place him No. 14 on our rich list) reportedly paid $21 million for a Fifth Avenue co-op owned by former Tyco International chief executive L. Dennis Kozlowski. And Caxton Associates' Bruce Kovner, third on the rich list (with $550 million), is said to be spending well upwards of $20 million to refurbish the 20,000-square-foot Federal-style mansion he bought on New York's Fifth Avenue in 1999 for $17.5 million.
Whatever cultural or social (or property) ambitions the top 25 hedge fund managers may have, they landed on our list because they have been superb investors over the long haul. But in a notable development, they are no longer quite so reserved about it: Not content to look for opportunities in today's lackluster markets, many are making things happen through aggressive shareholder activism of a sort not witnessed in more than two decades.
"Hedge funds are definitely flexing their muscles," declares George Bason Jr., co-head of the merger practice at New York law firm Davis Polk & Wardwell. Adds former Georgeson Shareholder Communications vice chairman John Wilcox, who recently joined TIAA-CREF as head of corporate governance, "It reminds me of the role arbitrageurs played in the 1980s, when we had financially driven takeovers."
Hedge funds played pivotal, and well-publicized, roles in the ouster of the head of Deutsche Börse and in the shake-up of the board at video rental chain Blockbuster. The striking thing about this new hedge fund activism is how pervasive, and how relentless, it has become.
Late last year Perry Capital's Richard Perry, No. 13 on the rich list (with $153 million), engineered a complex and controversial transaction involving his Perry Partners fund with the aim of ensuring that Mylan Laboratories completed its purchase of King Pharmaceuticals, in which Perry Partners had a sizable interest. Perry scooped up enough shares of Mylan to be able to exert sway in the generic-drug maker's boardroom as the company's largest shareholder. Simultaneously, however, he shorted an equal amount of Mylan stock to hedge his bet. Despite all this maneuvering, the Mylan-King merger — fiercely opposed by Mylan shareholder and onetime corporate raider Carl Icahn — appeared to have collapsed as of mid-May, because of accounting issues at King. Nonetheless, Perry's ploy underscores the lengths to which hedge fund managers will go to do deals.
In March, Beverly Enterprises agreed to put itself up for sale two months after Appaloosa Management's David Tepper — who made $420 million last year, placing him at No. 5 on the rich list — and other investors proposed to buy the nursing home company. The investors won the right to participate in the auction of Beverly.
"I'd be lying to say I didn't look up to guys like Carl Icahn, T. Boone Pickens, the Coniston Partners, Irwin Jacobs — people like that — as corporate heroes," says one of the more activist hedge fund managers, Daniel Loeb of Third Point (No. 20, with $110 million). "I was in my early 20s, and these guys were coining serious money by buying positions in undervalued companies and taking on entrenched management head-on."
Perhaps the exemplar of the hedge fund activist writ large is ESL's Lampert — the first to crack the $1 billion mark in our four-year-old survey. Last year he orchestrated a merger between two of his holdings, shopworn retailers Sears, Roebuck & Co. and Kmart Holding Corp. Lampert's majority stake in Kmart, mostly bought while the company was in bankruptcy, more than tripled in price last year. Meanwhile, his Sears shares surged 12 percent. ESL racked up an estimated 69 percent gross return.
Lampert was hardly the only hedge fund manager to break the bank despite decidedly lackluster returns for hedge funds as a group. (Consulting firm Hennessee Group calculates that the average hedge fund was up just 8.3 percent last year.)
Quant guru James Simons of Renaissance Technologies Corp. made $670 million, putting him at No. 2 on the list. His Medallion fund rolled up a 24.9 percent net gain. SAC Capital's Cohen managed 23 percent net. Caxton's Kovner can't brag about his performance — his Caxton Global Investments fund was up 9.9 percent in 2004 — but he has such a huge personal stake in his funds from years of exceptional returns that he still finished high up on the rich list.
On the whole, the biggest earners tended to do well both because they had lots of their own capital in their funds and because they achieved great performance. Others less wealthy (though hardly poor) benefited principally from extraordinary gains. The best example: Tontine Associates' Jeffrey Gendell, No. 12 on the rich list. His take was $180 million, mainly because his key fund rolled up a 101.4 percent net return.
Still others of the top 25 collected huge sums despite so-so returns, because they have so much capital in their funds. The single-digit (net) set includes Kovner; Soros Fund Management's George Soros (No. 6), who made $305 million; and Highbridge Capital Management's Glenn Dubin and Henry Swieca (tied at No. 18), each of whom earned $115 million.
Hedge fund managers, of course, cultivate secrecy almost as assiduously as they do returns. But even those who have not set out to become activists are collectively moving the markets. Consulting firm Greenwich Associates found that in 2004 hedge funds accounted for 82 percent of trading in U.S. distressed debt and almost 30 percent of trading in U.S. credit derivatives and sub-investment-grade bonds. Cohen's $6 billion-in-assets SAC Capital is alone responsible for about 3 percent of the trading volume on the New York Stock Exchange.
Such clout may not be altogether a bad thing. Federal Reserve Board chairman Alan Greenspan, for one, has said that "hedge funds have become major contributors to the flexibility of the financial system — a development that proved essential to our ability to absorb so many economic shocks in recent years."
Yet even for excess-inured New Yorkers, the shock of hedge fund managers' pay may take some getting used to.
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1. $1.02 billion
Edward Lampert
ESL Investments
Attention, Sears shoppers: Eddie Lampert is in the house. More J.P. Morgan than George Soros, the ESL Investments chief pulled off a daring coup in March 2005 using his substantial stakes in Kmart Holding Corp. and Sears, Roebuck & Co. to merge the two famed but fading retailers into Sears Holdings Corp. At year-end his Kmart and Sears stakes combined accounted for 63 percent of his $9.2 billion equity portfolio. So far the bet has been nothing short of brilliant: Lampert's Kmart shares — one of just a handful of stakes the value-oriented investor holds — more than tripled in value last year, helping to lift his overall portfolio by an estimated 69 percent, before his 1 percent management fee and 20 percent performance fee. Some market observers speculate that Lampert will use Sears' cash flow to do additional deals.
Lampert held shares in just three companies other than Kmart for the full year. The stocks rose modestly: Sears by 12 percent, AutoZone by 7 percent and AutoNation by nearly 5 percent. Lampert also did a little pruning in 2004. Early on he sold a big chunk of Footstar at a 25 percent premium over its year-end 2003 price. In the first quarter of 2004, he also sold off his small stake in financial services company Providian Financial Corp. for roughly 37 percent more than it traded for at the end of 2003.
The 42-year-old Lampert, whose firm is based in Greenwich, Connecticut, knows firsthand how elusive wealth and security can be. He grew up in upscale Roslyn on New York's Long Island, but when he was 14, his lawyer father died at 47. In January 2003, Lampert was kidnapped and held for two days until he escaped. Lampert graduated summa cum laude with a bachelor's degree in economics from Yale University, where he was a member of Skull & Bones. He started as an arbitrageur under former U.S. Treasury secretary Robert Rubin at Goldman, Sachs & Co. Lampert left to start ESL in 1988, working out of the Fort Worth, Texas, offices of investor Richard Rainwater, who staked Lampert with $28 million. The two subsequently had a falling-out.
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2. $670 million
James Simons
Renaissance Technologies Corp.
An award-winning geometrician, Jim Simons knows the angles like few other investors. Last year his Medallion fund posted a return of 24.9 percent net of his stiff fees: 5 percent for management and 44 percent of performance. That works out to a gross return of some 44 percent. Since the fund's inception he has returned nearly 38 percent net to investors (though in the early years, his fees were much lower). Simons has long charged that 5 percent management fee, but as recently as 2001, his performance fee was 20 percent.
Helping to maintain those sky-high returns, Simons keeps a close grip on the size of his fund, which is increasingly becoming a vehicle to invest just the money of partners and employees. Last year Medallion gave back all current income and 50 percent of the capital of nonemployees. Another move toward becoming more closely held: The firm recently removed its presence from the Web.
Simons uses sophisticated computer programs to trade rapidly and frequently employs a lot of leverage. Regulatory filings show that Renaissance had a $9.6 billion equity portfolio spread over 1,654 issues at the end of 2004, up from $8.5 billion at the end of the previous quarter but well down from $15 billion at the end of the third quarter of 2003. Simons' largest holdings at year-end 2004 were (in order of size): Oracle Corp., Coca-Cola Co., Verizon Communications and EBay.
Famed for eschewing traditional Wall Street types in favor of science and math whizzes, East Setauket, New York–based Renaissance employs some 60 individuals with Ph.D.s. Simons, 67, received his bachelor's degree from the Massachusetts Institute of Technology and his Ph.D. in mathematics from the University of California at Berkeley. A former chairman of the mathematics department at the State University of New York in Stony Brook who has taught math at MIT and Harvard University, Simons wants to boost the math skills of both students and teachers. In early 2004 he founded Math for America with other top mathematicians, investment bankers and educators. Last November the group, which Simons chairs, said it would contribute $25 million to establish the Newton Fellowship Program, which will train 180 math teachers for New York City public high schools over the next five years and give 40 to 45 math teachers stipends of $50,000 over four years for professional development.
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3. $550 million
Bruce Kovner
Caxton Associates
Though his firm's performance has improved, Bruce Kovner continues — for him, anyway — to struggle. Last year's return of 9.93 percent outdid the 8.10 percent for 2003 — Kovner's worst showing in a decade — but remains far from the 30 percent annualized gains enjoyed over the past 22 years by his flagship, $9.2 billion offshore fund, Caxton Global Investments. Much of Caxton's 2004 return came in the fourth quarter, when the fund's shares rose by 7.69 percent. In a letter to investors, Caxton chief economist John Makin said that fourth-quarter gains in currencies, stocks, commodities and non-U.S. financials outweighed losses in energies and that U.S. financials underpinned the fourth-quarter showing. The fund had a strong first-quarter 2004, racking up a 4.6 percent increase on gains in commodities, energies, stocks and financials, which overcame losses in currencies.
At the end of 2004, New York–based Caxton had a $3.4 billion equity portfolio of 580 individual issues. The biggest position by far was a $311 million stake in SPDRs, exchange-traded funds that mimic the Standard & Poor's 500 index. His largest stock positions, in order: Guidant Corp., Conseco, Mandalay Resort Group, Assurant and R.H. Donnelley Corp. Kovner also simultaneously hedged a number of long positions with puts in issues that included Chemed Corp., Cleveland-Cliffs, Kmart Holding Corp. and Time Warner.
A Harvard College grad, Kovner, 60, is founder and chairman of the School Choice Scholarships Foundation, which provides scholarships for low-income students from New York City to attend primary schools of their choice. He is also chairman of the board of trustees of the Juilliard School, chairman of the American Enterprise Institute and a member of the boards of the New York Philharmonic and of the Thomas B. Fordham Foundation, which promotes reform of elementary and secondary schools. Kovner is also vice chairman of Lincoln Center for the Performing Arts. A recent New York Times story estimated that Kovner is spending between $20 million and $40 million to renovate his redbrick Federal-style townhouse at Fifth Avenue and 94th Street, which had housed the International Center of Photography. He bought it for $17.5 million in 1999.
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4. $450 million
Steven Cohen
SAC Capital Advisors
Few, if any, people trade stocks as rapidly or aggressively — or anywhere near as successfully — as Stevie Cohen, whose Stamford, Connecticut–based SAC Capital Advisors regularly accounts for about 3 percent of the New York Stock Exchange's average daily volume. In 2004, SAC, which manages some $6 billion, turned in another spectacular year — a 23 percent average net return for its various funds. Given Cohen's exceptionally high performance fees — he earns up to 50 percent of his funds' returns on some funds — that translates into a roughly 40 percent gross return.
Cohen, 49, dramatically increased the size of his equity portfolio last year, to $8.6 billion at year-end from $3.2 billion at the end of 2003. His biggest positions in December 2004: cellular company Sprint Corp., utilities TXU Corp. and NRG Energy, medical-devices maker Stryker Corp. and four different issues of IShares, which are exchange-traded funds. He heavily hedged these positions with puts, including ones on IShares and individual stocks, including American Pharmaceutical Partners, U.S. Steel Corp. and Electronic Arts.
Like other hedge fund managers, Cohen has begun to play a more active role in certain of his investments. In November, SAC provided $40 million in financing to embattled retailer Wet Seal in exchange for convertible notes and warrants. The retailer subsequently removed its chief executive, who had failed to turn around the ailing company, and Wet Seal later became the subject of an informal Securities and Exchange Commission probe into circumstances surrounding the delayed filing of its second-quarter 2004 results. Cohen, a graduate of the University of Pennsylvania's Wharton School, has also begun to amass bigger, longer-term stakes of at least 5 percent in other chains, including video rental companies Blockbuster and Movie Gallery and health club operator Bally Total Fitness Holding Corp.
A celebrated art collector, Cohen has for the past three years been named one of ARTnews magazine's top ten collectors. The New York Times estimates that since 2000 he has spent more than $300 million building a collection that includes works by Jackson Pollock, Édouard Manet, Edgar Degas and Roy Lichtenstein. Cohen is also said to have plunked down $8 million for Damien Hirst's 14-foot tiger shark submerged in a tank of formaldehyde.
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5. $420 million
David Tepper
Appaloosa Management
His returns can be as up-and-down as a painted pony on a carousel, but David Tepper has been riding high of late: Last year he managed a nearly 34 percent net return. Not too bad, except in comparison to Tepper's otherworldly performance in 2003, when his two main funds — Appaloosa Investment I and Palomino Funds — racked up nearly 150 percent returns net of his 1 percent management fee and 20 percent performance fee, earning him some $510 million for the year.
Of his 42 percent gross gains in 2004, 23 percentage points' worth came from plays in equities, particularly mining, coal, steel and copper and other commodities stocks. His second- and third-biggest gains came from positions in U.S. Steel Corp. and Peabody Energy Corp. His biggest moneymaker: Enron Corp. bonds. Altogether, junk positions accounted for 14 percentage points of his returns.
Tepper, who ran $3.6 billion at year-end '04, has been more cautious of late, moving 20 percent of his assets into cash. He gave $700 million back to his investors at year-end. The 47-year-old, who started Chatham, New Jersey–based Appaloosa in 1993 after heading junk bond trading at Goldman, Sachs & Co., teamed up earlier this year with Formation Capital, Franklin Mutual Advisers and Northbrook NBV to launch a proxy fight against Beverly Enterprises, after the nursing home operator rejected their $1.5 billion takeover bid. The investors — Formation, Appaloosa, Franklin Mutual and Northbrook — agreed to back off shortly before the April 21 annual meeting, when they reached an agreement with Beverly to participate in an auction of the company.
Last year Tepper and his wife, Marlene, pledged $55 million to Pittsburgh's Carnegie Mellon University School of Business, where he received a master's degree in industrial administration in 1982. The school was renamed the Tepper School of Business. The couple also gave $27 million to the David Tepper Charitable Foundation, which donates to, among other organizations, Care, Goodwill Rescue Mission and the Salvation Army, according to data compiled by the Chronicle of Philanthropy for Web magazine Slate.com.
To view the full article and the entire issue of Alphamagazine, including the Hedge Fund 100, click here to subscribe.
George Soros
Soros Fund Management
Paul Tudor Jones II
Tudor Investment Corp.
Kenneth Griffin
Citadel Investment Group
Raymond Dalio
Bridgewater Associates
Israel Englander
Millennium Partners
James Pallotta
Tudor Investment Corp.
Jeffrey Gendell
Tontine Associates
Richard Perry
Perry Capital
James Dinan
York Capital Management
Marc Lasry
Avenue Capital Group
Daniel Och
Och-Ziff Capital Management Group
Stephen Mandel Jr.
Lone Pine Capital
Glenn Dubin
Highbridge Capital Management
Henry Swieca
Highbridge Capital Management
Lee Ainslie III
Maverick Capital
Stanley Druckenmiller
Duquesne Capital Management
Daniel Loeb
Third Point
Louis Bacon
Moore Capital Management
Leon Cooperman
Omega Advisors
Thomas Steyer
Farallon Capital Management
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