April 16, 2007
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.
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