Friday, May 26, 2006

The big bucks

Hedge fund compensation is shocking, although I'll give credit to anyone who can actually generate alpha. The top performers deserve their money, and if the mediocre guys are overpaid, at least their investors are sophisticated enough to know better. Jim Simons and his team actually donated funds to support the Relativistic Heavy Ion Collider, which ran out of money last year. 29 percent net of fees is incredible, considering they do it consistently.

Most studies show that wealth and income inequality in the US are near all-time highs, matched only by the 1920's, just before the Great Depression.

NYTimes: Just when it seems as if things cannot get any better for the titans of investing, they get better — a lot better.

James Simons, a math whiz who founded Renaissance Technologies, made $1.5 billion in 2005, according to the survey by Alpha, a magazine published by Institutional Investor. That trumps the more than $1 billion that Edward S. Lampert, known for last year's acquisition of Sears, Roebuck, took home in 2004. (Don't fret for Mr. Lampert; he earned $425 million in 2005.) Mr. Simons's $5.3 billion flagship Medallion fund returned 29.5 percent, net of fees.

No. 2 on Alpha's list is T. Boone Pickens Jr., 78, the oilman who gained attention in the 1980's going after Gulf Oil, among other companies. He earned $1.4 billion in 2005, largely from startling returns on his two energy-focused hedge funds: 650 percent on the BP Capital Commodity Fund and 89 percent on the BP Capital Energy Equity Fund.

A representative for Mr. Simons declined to comment. Calls to Mr. Pickens's company were not returned.

The magic behind the money is the compensation structure of a hedge fund. Hedge funds, lightly regulated private investment pools for institutions and wealthy individuals, typically charge investors 2 percent of the money under management and a performance fee that generally starts at 20 percent of gains.

The stars often make a lot more than this "2 and 20" compensation setup. According to Alpha's list, Mr. Simons charges a 5 percent management fee and takes 44 percent of gains; Steven A. Cohen, of SAC Capital Advisors, charges a management fee of 1 to 3 percent and 44 percent of gains; and Paul Tudor Jones II, whose Tudor Investment Corporation has never had a down year since its founding in 1980, charges 4 percent of assets under management and a 23 percent fee.


Anonymous said...

One of the people on the list is Daniel Loeb of Third Point LLC. I wonder if it's the same Daniel Loeb who graduated from Caltech and got a PhD at MIT in math.

Steve Hsu said...

Last I heard, our Danny Loeb was in France doing research in mathematics (CNRS?). While it is entirely possible that he has wised up in the meantime and is now working at a hedge fund, I don't think there's been enough time for him to have risen so far. But I could be wrong ;-)

Steve Hsu said...

I just checked, and Danny did indeed leave academia for a hedge fund. But he was doing stat arb (pretty quantitative) while the big bucks Loeb in the article has a very different style (event-driven). If he is our Danny, I hope he endows a few chairs in combinatorics at Caltech :-)

Anonymous said...

Well, the article describes Danny Loeb as a "1984 Columbia University economics grad", so probably not.

Steve Hsu said...

Never hurts to read the article ;-)

Quantoken said...

Not to discredit James Simmons. But I must point out that the gain of his fund in 2005, at 29%, in terms of US dollars, is NOTHING impressive at all. Actually it was a very disappointing return, I might point out.

Mr. Simmons can do any of the things below in 2005, which does not require a math wiz or any intelligence, and gained much more than 29% in 2005:

1.Buy some metal copper at the beginning of 2005, and sell them at the end of the year.

2.Buy some metal Zinc at the beginning of 2005, and sell them at the end of the year.

3.Buy some crude oil at the beginning of the year, and sell at the end of year.

4.Buy some gold or silver at the beginning of the year, and sell them at the end.

5.Or even buy some coffee beans and sell them at the end of the year.

6.Buy some eggs and sell them one year later, assuming Mr. Simmons can keep the eggs fresh!!!

7.Buy some live hogs and sell one year later, assuming Mr. Simmons can keep the pigs alive!

....The list goes on.

The point of matter is the US dollar had lost more than 29% of purchasing power during the time period. So gaining 29% in US dollars is actually a LOSS. You buy anything and hold through the period you could have "gained" more.

Quantoken said...

The reason I posted the above message, is to test that whether Steve, who is interested in matters related to money and economy, is actually totally aware of, or totally clueless, to the Great Prophecy made in 2001 and completely proven correct by the time now. And if he is aware of the direction of the market, whether he care to comment on it or not.

Have you guys read the James Turk book about the imminent collapse of US dollar?

Steve Hsu said...


I've been bearish on the dollar for some time now. In fact, I've discussed it many times on this blog.

Sure, someone can make 30% in a year (esp. with hindsight, or by taking a lot of risk). Can they do it 20 years in a row with very few down months? If not, they are not as impressive as Simons.

Dan Loeb said...

Nope. That is Daniel Seth Loeb the hedge fund manager. I am Daniel Elliott Loeb the quant.

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