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Fund Forward

Editor's Desk: Mutual Funds' Interest in Hedge Funds May be Due To More Than Performance

With the stratospheric salaries that hedge fund managers are earning these days, there may be more to mutual fund managers' interest in employing hedge fund strategies than performance. Sure, they claim they're turning to riskier tactics to deliver better returns and distinguish themselves from the competition. In fact, many experts believe that mutual funds' use of hedge fund strategies is a growing trend and that the lines between institutional and retail investment strategies will blur.

But the salaries that hedge fund managers are earning are mind-blowing. Certainly, they haven't escaped the attention of mutual fund portfolio managers-and they could potentially lead to more lucrative deals for mutual fund executives who look to join the elite.

Can you imagine a hedge fund manager earning as much as $2 billion and returning 317% in a single year? John Arnold, head of Centaurus Energy, accomplished this astounding feat by betting correctly on the price of natural gas, according to Trader Monthly, which just released its list of the 100 highest-paid hedge fund managers. And Arnold did it with just $2 billion in assets. Even more impressive, since launching his fund in 2002, the 33-year-old has returned 200%-plus every year except 2005, when his fund was up 178%.

Next up is James Simons, who runs the $5.7 billion Medallion fund, which rose 40% in 2006 and also earned him between $1.5 billion and $2 billion. The 68-year-old MIT graduate has had an impressive career, first starting out as a mathematician and codebreaker for the Defense Department.

According to Trader, Simons and Arnold each earned the largest sum anyone has ever earned in a single year. Following them, the next three highest-paid hedge fund managers took home more than $1 billion: Edward Lampert of ESL Investments and T. Boone Pickens of BP Capital, both of whom raked in between $1 billion-$1.5 billion, and Steve Cohen of SAC Capital Advisors, who banked $1 billion. The average take for the top 100 was $241 million.

Put in the context of what one of the top earners in the mutual fund industry earned in 2005-Mario Gabelli's $55.5 million-the figures are truly incredible and will undoubtedly motivate more mutual fund managers to reach for the hedge fund stars.

Let's see if they manage to take investors along for the ride.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

http://www.mmexecutive.com http://www.sourcemedia.com

Recent Posts

Mutual Funds Must Go High-Tech-v. 3.0

Over the last number of years, mutual fund transfer agencies and shareholder communications companies have tried to convince shareholders to accept paperless summary prospectuses, proxies, trade confirmations and electronically stamped signatures. Fund supermarkets and web home pages have broadened their horizons to include market commentary, videostreaming and personal financial news. At the same time, exchange-traded funds, funds-of-funds, hedge FoFs, unified managed accounts, target dates, 401(k) auto enrollment and heightened awareness among people throughout the country of the difficulties of being retired-have taken off.

Test of the Massey Mine

Fund giant boards of directors at AllianceBernstein, American Funds, Fidelity, Vanguard and others are reportedly starting to bring about meaningful change in the corporations in which they are invested. Proof should come any day now, when the shareholder proxy votes from the annual meetings are released. Fund chief executive officers spoke about the power and influence their proxies wield in an interesting Reuters article last week, "Mutual Funds Seek to Shed 'Rubber Stamp' Tag."

Milestones

In 2011, 401(k) plans will turn 30, but the milestones the mutual fund industry has reached in this time are but a nanosecond in the history of U.S. retirement policy. Executives we interviewed for this special edition of Money Management Executive for the Investment Company Institute's meeting in Washington, speak to important milestones of the recent past and into the future. Look inside for observations and forecasts by Ted Benna, Robert L. Reynolds, Dan Fuss, David C. John, Steven Miyao and others.

At Age 30, It's Time for a Revamping for the 401(k)

This year marks the 30th anniversary of the 401(k), the revolutionary retirement savings vehicle that has been annihilating pension plans, empowering individuals to take part in the stock market-and, sadly, that left retirees with the misfortune of leaving the workforce in 2000 or 2008 very badly off. The cracks in the system are prompting many asset managers, regulators and retirement experts to take a hard look at 401(k)s and how they can be fixed.

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Lee Barney

Lee Barney served as editor of Money Management Executive from 2002 to 2010. Previously, at United Media’s Wall Street & Technology magazine and Risk/Waters Information Services, she covered financial IT. For TheStreet.com, she wrote the daily “Meet the Street” column covering a broad spectrum of market-moving events. Lee began her career as a reporter in Tokyo with The Japan Times and was executive editor of Spotlight magazine.