Hedge fund managers are raking in billions, even though many fell short of the market’s returns.
The year 2013 was a great time to be a hedge fund manager.
According to an annual ranking by Institutional Investor’s Alpha magazine, the top 25 highest-earning hedge fund managers in the U.S. were paid a mind-boggling total of $21.15 billion last year.
Pick up your jaw and prepare for it to drop again after you read this little nugget from The New York Times:
They earned that hefty sum in a year when most hedge fund managers fell short of the market’s returns. The multibillion-dollar payday is the highest since 2010, and it is 50 percent more than in 2012, according to the survey.
So, just so we’re all on the same page: Even though many hedge funds underperformed the stock market last year, hedge fund managers still managed to bring home the multibillion-dollar bacon. In comparison, CEOs of large U.S. companies received, on average, $12.3 million in compensation in 2012.
Steven Cohen of SAC Capital Advisors came in second to Tepper, earning $2.4 billion in 2013. But he won’t be making the list again. His firm pleaded guilty to charges stemming from insider trading and agreed to pay $1.8 billion in penalties. CNN Money said:
His firm, which renamed itself Point72 in the wake of its conviction, is no longer allowed to manage money for other investors. Instead, the firm now operates as a “family office,” which means it only invests on behalf of Cohen and his employees. With $9.2 billion in assets, it’s still considered a formidable force on Wall Street.
So how are hedge fund managers’ paychecks determined? The Times said:
The size of these paychecks are estimates based on the value of the managers’ stakes in their hedge funds and the fees they charge. Investors typically pay management fees of 2 percent of the total assets under management and 20 percent of the profits, or “2 and 20.”
Many hedge fund managers also invest their own money in their funds, Bloomberg said.
If you think the multibillion-dollar paychecks for hedge fund managers are bad, consider this: The Center for Effective Government says:
Hedge fund managers continue to take advantage of a very costly loophole called carried interest. This loophole allows their gargantuan pay packages to be taxed at 23.8 percent (a 20 percent capital gains tax, plus a 3.8 percent surtax to help fund Medicare) rather than the 43.4 percent tax (39.6 percent income tax rate plus 3.8 percent Medicare tax) if these earnings were taxed as wages.
It will be interesting to see how many zeroes are on hedge fund managers’ paychecks for 2014, especially considering that hedge funds just posted their worst first-quarter results since 2008, according to Bloomberg.
In my next life, I’d like to come back as a hedge fund manager. Even when your work isn’t great, you still rake in the unbelievably big bucks.
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