Paulsons $3.7 Billion Top Hedge Fund Pay, Alpha Says

Date: Wednesday, April 16, 2008
Author: Tom Cahill and Poppy Trowbridge, Bloomberg

John Paulson, founder of New York- based Paulson & Co., was paid an estimated $3.7 billion last year, the most in the hedge fund industry, according to Institutional Investor's Alpha Magazine.

Paulson, 52, surpassed George Soros and 2006's top earner James Simons in a ranking of the 50 highest-paid hedge fund managers. Soros placed second, earning about $2.9 billion. Simons was third, making an estimated $2.8 billion last year.

Paulson & Co., which oversees about $28 billion, made money betting on the collapse of subprime mortgages in 2007. The Paulson Credit Opportunities Fund soared almost sixfold, helped by bets on slumping housing and subprime mortgage prices, according to investor letters obtained by Bloomberg.

``Paulson made all that money because his returns were absolutely exceptional -- he called the market right,'' said John Godden, managing partner of IGS, a London-based hedge fund consultant. ``The lucky people in his funds also made fabulous returns.''

Average compensation for the top 25 fund managers was $892 million in 2007, up 68 percent from the previous year. The minimum compensation included in the ranking was $210 million, Alpha said. That's more than triple the $67.9 million awarded Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein.

Those salaries may be a high-water mark for the $1.9 trillion industry, which had its worst start in nearly two decades this year. Hedge funds lost 2.8 percent in the first three months of the year after gaining 10 percent in 2007, according to Chicago- based Hedge Fund Research Inc.

`Peak Year'

``Right now it's looking like 2007 was that peak year, but it's dangerous to make a 12-month assumption on one quarter,'' said Godden. Many funds may benefit from volatility this year, he said.

Hedge funds managers make most of their compensation by keeping a percentage of profits, typically 20 percent. They get no performance fees unless their returns are positive, though they do typically keep a 2 percent management fee.

Five of the managers on Alpha's list of 25 best-paid managers in 2006 didn't make it in 2007 because their funds underperformed or lost money. Edward Lampert, the 45-year-old hedge fund manager who is now chairman of Sears Holdings Corp., didn't make the list because he lost money in 2007, according to Alpha.

Soros, 77, returned 32 percent in 2007 for his $17 billion Quantum Endowment Fund. Quantum's returns this year have ranged from up 3 percent to down 3 percent through the end of March.

Struggling This Year

Some of last year's top paid managers are struggling this year as banks tighten lending standards and markets gyrate. At least a dozen funds, including the $4 billion Peloton Partners LLP, have liquidated or required cash infusions this year.

Simons, 69, is down 12 percent since last May's peak at his $18 billion Renaissance Institutional Equities Fund, investors said last week.

Stephen Mandel, 52, ranked eighth with $710 million in compensation last year, was down about 10.6 percent in his Lone Cedar Fund at the end of March from a high in December, according to people familiar with the fund.

Some managers that ranked low on the 2007 pay list have started 2008 with some of the industry's biggest gains, benefiting from forced selling and timing market swings.

Alan Howard, former head of proprietary interest-rate trading at Credit Suisse Group who founded Brevan Howard Asset Management in 2002, is up 16 percent in his flagship macro fund through April 11, according to a net-asset-value filing yesterday. The $17 billion fund returned 25 percent in 2007, earning Howard, 44, $245 million and ranking 41st on Alpha's list.

No. 44

David Harding, the 46-year-old founder of Winton Capital Management, made $225 million in 2007, ranking 44th, according to Alpha. Winton's $6.3 billion Winton Futures Fund gained 11 percent in the first three months of the year after rising 18 percent in all of 2007, according to data compiled by Bloomberg.

Paulson was a partner at New York-based investment firm Gruss Partners and a former managing director at Bear Stearns Cos. He has a master's degree in business from Harvard Business School.

Alpha estimates managers' earnings based on assets under management, fees, returns, personal investments in the funds and ownership stakes in their firms.

Hedge funds are mostly private and unregulated pools of capital where managers can buy or sell any assets, participating substantially in the profits of the money invested.

Outside the hedge fund industry, 2007 was a bad year for finance, with Citigroup Inc. and UBS AG recording a combined $232 billion in asset writedowns and credit losses. Merrill Lynch & Co. and Citigroup changed chief executives, while some surviving managers such as John Mack, chairman and CEO of Morgan Stanley, took no bonuses.

Top 10 moneymakers in the hedge-fund industry in 2007:

1 $3.7 billion, [bn:PRSN=1] John Paulson [], Paulson & Co.
2 $2.9 billion, [bn:PRSN=1] George Soros [], Soros Fund Management
3 $2.8 billion, [bn:PRSN=1] James Simons [], Renaissance Technologies Corp.
4 $1.7 billion, [bn:PRSN=1] Philip Falcone [], Harbinger Capital Partners
5 $1.5 billion, [bn:PRSN=1] Kenneth Griffin [], Citadel Investment Group
6 $900 million, [bn:PRSN=1] Steven Cohen [], SAC Capital Advisors
7 $750 million, [bn:PRSN=1] Timothy Barakett [], Atticus Capital
8 $710 million, Stephen Mandel Jr., Lone Pine Capital
9 $625 million, [bn:PRSN=1] John Griffin [], Blue Ridge Capital
10 $520 million, O. [bn:PRSN=1] Andreas Halvorsen [], Viking Global Investors

To contact the reporter for this story: Tom Cahill in London at tcahill@bloomberg.netPoppy Trowbridge in London at ptrowbridge@bloomberg.net