Institutional Investor's Alpha Magazine - April 2008 - (Page 36)

Top 50 Moneymakers and the U.S. plunges into recession. Undoubtedly, the huge paydays chronicled here are sure to cause a heightened level of envy and resentment toward hedge funds, and will draw additional scrutiny by Washington, which is already weighing whether to increase regulation. Certain facts perhaps speak best for themselves: • The top 25 managers earned, on average, $892 million in 2007, up from $532 million in 2006. Five of the managers on this year’s list each made more in 2007 than the $1.2 billion that JPMorgan Chase & Co. agreed to pay for the almost failed 85-year-old Bear Stearns Cos. • When we published our inaugural list, in 2002, Soros led the way with $700 million, a showing that this year would have put him at No. 9. Back then it took $30 million to crack the top 25; this year, $360 million. • The grand total earned by the top 25 in our 2003 ranking, almost $2.8 billion, was less than what any of the top three managers made this year and less than one ﬁfth of what the top ten made altogether ($16.1 billion). • Though we doubled the size of our list from 25 to 50 this year, longtime New York–based star managers Mark Kingdon of Kingdon Capital Management and Raj Rajaratnam of Galleon Group both miss the cut, despite each making about $200 million. This year’s minimum: $210 million. Alpha uses two components to calculate earnings: managers’ share of their ﬁ rm’s performance and management fees, as well as gains on their own capital. (For multibillionaires like Soros and Simons, the latter can be substantial.) We exclude, however, any proceeds from the sale of a ﬁrm or from a public offering, which is more a reﬂection of managers’ business acumen than of their investment prowess. Still, it’s hard to ignore the enormous wealth being generated by such deals. Daniel Och was worth more than $4.5 billion the day after New York– based Och-Ziff Capital Management Group went public last fall. And GLG Partners co-founders Noam Gottesman and Pierre Lagrange each made more than $1 billion by engineering an IPO of their London firm last summer through a merger. Gottesman and Lagrange are two of the eight U.K.based hedge fund managers who make this year’s Alpha list. The others are ﬁ rst-time qualiﬁers Greg Coffey of GLG, David Harding of Winton Capital Management, Alan Howard of Brevan Howard Asset Management, Michael Platt of BlueCrest Capital Management, and Hugh Sloane and George Robinson of Sloane Robinson Investment Services. Age knows no bounds in our rankings. Soros is 77. Oil-magnate-turned-hedge-fund-manager T. Boone Pickens Jr. turns 80 in May. Pickens ties for 23rd place with another beneficiary of the subprime bust, John Burbank of Passport Capital; each made $370 million last year. Julian Robertson Jr., the renowned 75-year-old founder of Tiger Management Corp., misses our list on a technicality: He doesn’t handle other people’s money (see “Tiger, Tiger, Burning Bright,” page 38). And glory can be ﬂeeting. Five managers from last year’s top 25 are now ofﬁcially, well, last year’s news, including billionaires Edward Lampert of ESL Investments and Caxton Associates’ Bruce Kovner (see “Off the List, but Not Exactly Starving,” page 48). A remarkable year by many measures, and one that will be difﬁcult to duplicate. The Top 50 Earners 1 John Paulson Paulson & Co. $3.7 BILLION John Paulson came out of nowhere in 2007 to pull off the greatest hedge fund trade of all time. While investment banks and others were writing off billions of dollars in losses from the collapse of the subprime mortgage market, Paulson was winning a shrewd, big bet that the credit crisis would get even worse. His ﬁrm, New York–based Paulson & Co., ended 2007 with $28 billion in assets, up from $6 billion at the start. As founder, president and senior portfolio manager, Paulson reaped $3.7 billion for himself from gains on his own capital and his share of the fees (1 percent for management, 20 percent for performance), the largest-ever single-year take for a hedge fund manager. As early as 2005, Paulson, 52, was shorting risky pools of collateralized debt obligations and buying credit default swaps on the cheap for the ﬁrm’s merger arbitrage and event-driven funds. Paulson was betting that the U.S.’s ﬁve-year housing bubble was ready to burst. He had little success at ﬁrst but stuck to his convictions. In June 2006 he launched the Paulson Credit Opportunities Fund, with initial assets of about $150 million, to short subprime mortgage-backed securities. The fund ﬁnished the year up nearly 20 percent, and in January 2007, Paulson launched a second fund, Credit Opportunities II. Unlike other managers who proﬁted mostly by shorting the ABX subprime mortgage index, Paulson and his team bet against individual CDOs and the underlying mortgage securities. By the end of the year, the original Credit Opportunities Fund had a net return of 590 percent; the newer credit fund was up 353 percent. Paulson earned an MBA from Harvard Business School and began his career as a management consultant with Boston Consulting Group. His ﬁrst Wall Street job was as an associate at Leon Levy and Jack Nash’s Odyssey Partners. In 1984 he left for Bear, Stearns & Co., where he became a managing director in mergers and acquisitions. In 1988 he joined merger- 36 • INSTITUTIONAL INVESTOR’S ALPHA • APRIL 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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