Tepper Tops Highest-Paid Hedgie List

Some of these numbers are just staggering. I remember when the whole world came unglued after Michael Milken paid himself $550 million in 1987. That wouldn't even cover David Tepper's tax bill on his 2012 earnings. That's right, kids: hedge fund managers are now into the 10-figures for all-in comp.

Tepper led the pack with an astounding $2.2 BILLION compensation package in 2012, but at least he made his clients some big money. Nipping at his heels was Ray Dalio at $1.7 BILLION and Stevie Cohen at $1.4 BILLION, and they didn't even beat the S&P.

“The managers who did well last year were those who focused on fundamental primary equity research,” said Carter Furr, a portfolio manager at Signature, an independent family office in Norfolk, Va., with $2.8 billion in assets.

“The guys who were paying attention to the macro picture, got caught up in the headlines and fear-mongering, lost sight of the fact we were having a stealth recovery in the United States,” he said.

Stealth recovery indeed. It never ceases to amaze me how these guys continue to capture assets when they can't even beat SPY. Why on Earth would anyone pay 2 and 20 to consistently underperform an ETF?

For the fourth consecutive year, most hedge funds failed to beat the market. The average hedge fund gained 6.4 percent last year, according to a composite index that tracks 2,200 portfolios compiled by Hedge Fund Research.

By comparison, the Standard & Poor’s 500-stock index climbed 16 percent when factoring in dividends. In 2011, the average hedge fund lost more than 5 percent, versus a 2 percent gain for the S&P. 500.

What else can you say about this industry? It is certainly good to be king.

I wonder if Simons gives Griffith any shit about not breaking a billion.

 
Best Response

Correct me if I'm wrong, but the vast majority of SAC's money is Cohen's right? If so, that pay package is materially misleading, given that it's basically him paying himself "fees" and collecting on the capital gains of his holdings - even if he didn't beat the S&P.

Reading through the DealBook article: indeed, these numbers take account of the money that these guys personally have invested in the fund - so take these with a grain of salt. If Cohen / Dalio want to put $5+ billion of their own money into their underperforming funds, of course they are going to bring home big "paychecks".

As for the capital influxes, I personally think it's a fairly big waste of money to try to invest in stock-pickers. That said, most institutional investors put money in hedge funds for uncorrelated, risk-adjusted returns. And they aren't idiots either: they invest in index and mutual funds as well as hedge funds - usually at a much higher rate. Benchmarking fund performance against the S&P doesn't tell the whole story. What was the R2 of these funds with the S&P over the time period? What was the Sharpe of these funds vs. the S&P?

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 

Ok, I'm trying to write this on a phone while on a lunch break outside (so mind typos).

I work at one of these megafunds (some of the certified users know which one - thanks for your help).

For the firm I work for, the CEO's payday may seem excessive for those outside our hallowed walls but few points

A) Many do not understand how our fees work - my firm is very client friendly.

B) Most outsiders also don't understand why our LPs need our services. Try managing a $300 - $700mm yourself & REQUIRE a consistent 5 - 8%, YoY return just so your AUM doesn't fall below a certain treshold. It's not as easy as it sounds on a yearly basis. Only so much capital can be put in a few good ideas (this also assumes your ideas are sound and the market will perceive it that way - given $20-50 mm investments will probably not move the needle in many mid-large cap stocks). Then there is the risk management side of things. This business is more risk management than capital appreciation than you give it credit for.

C) NS nailed it - a lot of the managers income is simply personal equity growth. The managers tend to own siginficant stakes in the firms although they might not be personally invested in all the funds themselves.

D) On point C - when the media discusses incomes of most "ordinary" Americans, they are simply discussing their wages/salaries. For fund managers they tend to discussing capital income where there wages/salaries are pretty meager on a relative basis. (An argument can be made part of the capital income is actually a wage due to cognitive inputs).

 

100% agree with hoping. People really underestimate the capital preservation aspect. If you Have one year where you are down 30% you are completely fucked (even if index is also down 30%). Also this these guys don't beat the market argument is retarded. The average fund doesn't beat the market. The average poker player also loses money. Doesn't mean the top guys don't beat it.

 
leveredarb:
100% agree with hoping. People really underestimate the capital preservation aspect. If you Have one year where you are down 30% you are completely fucked (even if index is also down 30%). Also this these guys don't beat the market argument is retarded. The average fund doesn't beat the market. The average poker player also loses money. Doesn't mean the top guys don't beat it.

It does make a difference if either:

1) The definition of "top guys" fluctuates wildly from year to year (read Paulson)

2) The number of "top guys" accords suspiciously well with the number of "top guys" that would be expected given a relatively normal distribution of fund returns

I completely agree with you, by the way, that these arguments about hedge funds not "beating the market" during the meteoric rise in equities over the last 5 years. The reason that institutionals invest in hedge funds is not to get index-like returns. Nevertheless, I think the idea of investing in celebrity stock pickers and expecting consistently high returns is dubious.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
NorthSider:
leveredarb:
100% agree with hoping. People really underestimate the capital preservation aspect. If you Have one year where you are down 30% you are completely fucked (even if index is also down 30%). Also this these guys don't beat the market argument is retarded. The average fund doesn't beat the market. The average poker player also loses money. Doesn't mean the top guys don't beat it.

It does make a difference if either:

1) The definition of "top guys" fluctuates wildly from year to year (read Paulson)

2) The number of "top guys" accords suspiciously well with the number of "top guys" that would be expected given a relatively normal distribution of fund returns

I completely agree with you, by the way, that these arguments about hedge funds not "beating the market" during the meteoric rise in equities over the last 5 years. The reason that institutionals invest in hedge funds is not to get index-like returns. Nevertheless, I think the idea of investing in celebrity stock pickers and expecting consistently high returns is dubious.

Top guy doesn't mean top results. Even in chess a superior player doesn't win 100% of the time. Not to hate on Paulson but the verdict of him being a top guy is somewhat mixed in the industry.

Could you link me to any studies looking at number of fund managers that would outperform by luck vs hose that actual do? Ideally need one that adjusts for probability of investors of similar style all beating the market. I am genuinely curious.

Poker is a zero sum game excluding rake. Relative market performance is also zero sum excluding trading fees. Rake/fees are why the average has to underperform by definition.

 
NorthSider:
leveredarb:
100% agree with hoping. People really underestimate the capital preservation aspect. If you Have one year where you are down 30% you are completely fucked (even if index is also down 30%). Also this these guys don't beat the market argument is retarded. The average fund doesn't beat the market. The average poker player also loses money. Doesn't mean the top guys don't beat it.

It does make a difference if either:

1) The definition of "top guys" fluctuates wildly from year to year (read Paulson)

2) The number of "top guys" accords suspiciously well with the number of "top guys" that would be expected given a relatively normal distribution of fund returns

I completely agree with you, by the way, that these arguments about hedge funds not "beating the market" during the meteoric rise in equities over the last 5 years. The reason that institutionals invest in hedge funds is not to get index-like returns. Nevertheless, I think the idea of investing in celebrity stock pickers and expecting consistently high returns is dubious.

This list actually looks suspiciously like the ones you could read 10 years ago. Let's not exaggerate how "wildly" the identities of the leaders fluctuate, there are clear mainstays on these type of lists and they got all got there by beating the market over the long-haul. Guys like Simons, Cohen and Tepper have been making close to 10 figures nearly year in and year out in a pattern which absolutely cannot be explained away by a random distribution.

And as far as Paulson goes, he got annihilated back in 2011, no need to bring up the recent bath he took on gold to have mixed feelings about his track record.

 
leveredarb:
100% agree with hoping. People really underestimate the capital preservation aspect. If you Have one year where you are down 30% you are completely fucked (even if index is also down 30%). Also this these guys don't beat the market argument is retarded. The average fund doesn't beat the market. The average poker player also loses money. Doesn't mean the top guys don't beat it.
Not to sound like a wise guy, but isn't poker a zero sum game? Shouldn't the average gain/loss be 0?
 
packmate:
leveredarb:
100% agree with hoping. People really underestimate the capital preservation aspect. If you Have one year where you are down 30% you are completely fucked (even if index is also down 30%). Also this these guys don't beat the market argument is retarded. The average fund doesn't beat the market. The average poker player also loses money. Doesn't mean the top guys don't beat it.
Not to sound like a wise guy, but isn't poker a zero sum game? Shouldn't the average gain/loss be 0?

Let's sit down and play a few hands and see if we can't figure that out...

 
packmate:
leveredarb:
100% agree with hoping. People really underestimate the capital preservation aspect. If you Have one year where you are down 30% you are completely fucked (even if index is also down 30%). Also this these guys don't beat the market argument is retarded. The average fund doesn't beat the market. The average poker player also loses money. Doesn't mean the top guys don't beat it.
Not to sound like a wise guy, but isn't poker a zero sum game? Shouldn't the average gain/loss be 0?

Not quite- you can have 4 players each lose 1 dollar and the "top" player will make 4. Still a zero sum game but 4/5 still lose.

 
Thurnis Haley:
The only Pitt alumni to ever be successful. I salute you, David Tepper.
You forgot Dan Marino.
''You can fool some of the people all of the time, and those are the ones you need to concentrate on.'' — President George W. Bush 0.5 bb
 

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