Wall Street's Highest Earners

The hedge fund industry saw steep declines last year. Just not these folks.

You'd be hard pressed to find anyone but limousine drivers and beaten-down investors shedding tears for the end of the hedge funds' golden age. The average hedge fund lost 18% last year, and one in seven shut its doors, according to Chicago's Hedge Fund Research. The people who run these funds have, deservedly or not, come to symbolize an unsavory version of Wall Street greed that focused on accumulating vast wealth with little accountability or oversight.

The end to good times, as so often happens, has been unevenly distributed. Witness our third annual scorecard of Wall Street's Highest Earners, which measures bankers, buyout artists and hedge- and mutual-fund runners. For the first time, it's made up entirely of hedge funders; the 20 that the list comprises earned an average of $515 million in 2008. How did they do it? Mainly by shorting the financial and energy sectors and doing successful merger arbitrage, which is most often a strategy of simultaneously shorting the stock of an acquirer and buying that of the seller.

Most of last year's top gainers are up again so far this year. James Simons, who runs Renaissance Technologies in East Setauket, N.Y., tops our list with earnings of $2.8 billion in 2008, even though two of his three funds were down for the year. The exception was his Medallion fund, which grew a staggering 84%, even after deducting its steep fees--44% of profits and 5% of assets (the industry standards are 20% and 2%). Things are looking up for Simons in 2009 as well. His largest fund, the $17 billion Institutional Equity, was up 3% compared to a 15% decline for the S&P 500 through March 20, the end date for our data gathering.

Simons, a former Defense Department code-breaker and mathematics professor at the State University of New York at Stony Brook, uses complex quantitative models to identify companies that are misvalued. He made $1.3 billion from his estimated 40% share of the company's fees and $1.6 billion on the appreciation of his own investments within the funds he manages. Chief scientist Henry Laufer, who helped formulate the firm's trading strategy and computer algorithms, is the second-largest equity owner in Renaissance. He was sixth on the list at $390 million.

John Paulson followed up his record-setting 2007, when he earned $3.3 billion, mostly from bets on the residential mortgage wipeout. Last year he took home another $1.9 billion. His firm, Paulson & Co. invested in companies on the brink of takeover, most notably Anheuser Busch, which became Paulson's largest position in October, just a month before the brewer's acquisition by Belgium's InBev was completed. Paulson's funds, all of which finished up between 6% and 38% after fees last year, have seen growth in 2009 thanks in part to a short position on Lloyd's Banking Group--its stock has dropped 45% since the start of the year.

New to the list are Roy Niederhoffer ($140 million) and Christian Levett ($130 million), whose flagship funds grew last year by 55% and 42%, respectively. Both men have continued to deliver positive returns in 2009, with the largest fund in Niederhoffer's eponymous firm up 4% and Levett's Clive Capital up 5% year-to-date.

Short-seller James Chanos, who famously predicted Enron's collapse, also made the list for the first time, ranking ninth with a $300 million paycheck. Ursus fund, Chanos' flagship, was up an estimated 48% net of fees, compared with 25% for the average short-selling hedge fund, according to Hennessee Group, a hedge fund data tracker.

The $10.3 billion in pay for the 20 highest earners was down 45% from 2007 and 22% from 2006. Twelve fund managers fell off our list because of big losses, including B.P. Capital's T. Boone Pickens, Och-Ziff's Daniel Och and Citadel Investment's Kenneth Griffin, whose two main funds were each down 55%.

These drop-offs will have to work extra hard, or change investing strategies, to regain their spots on the leaderboard. Hedge funds have strict rules that bar them from collecting a share of profits until they make back what they lost the prior year. For Griffin's two losing funds, that means more than doubling investors' money before he'll get his interest.

Government regulations may change the landscape as well. Congress held hearings last November to investigate the industry's role in the financial crisis. Treasury Secretary Timothy Geithner recently announced his intention to seek a greater say in hedge fund operations. The five fund managers called before the House Oversight Committee last fall happened to be the top five earners from last year's list, including Simons and Paulson. Christopher Hohn, our top-earning European fund manager in 2007, was called to testify before the U.K. Parliament in January.

To determine Wall Street's 20 highest earners of 2008, we examined hedge, private equity and mutual fund principals and traders, as well as investment bankers. Hedge fund bosses entirely dominated the list for the first time as private equity shops, which bought up companies at a record pace in recent years while credit was cheap, have seen their deals grind to a halt. Industry heavyweights like Blackstone Group and Kohlberg Kravis Roberts experienced massive write-downs and losses as the year wore on.

Our paycheck figures are pretax and net of the firm's expenses, and exclude proceeds from selling shares in their own business.

Wall Street's Top 5 Highest Earners

© Tim Sloan/AFP/Getty Images

No. 1: James Simons

Earnings: $2.8 billion
Age: 71
Firm: Renaissance Technologies
Headquarters: East Setauket, N.Y.
Rank Last Year: No. 5

More than 95% of Simons' 2008 earnings were the result of his share of fees from, and the appreciation of his own investments in, Renaissance's Medallion fund, which returned 84% to investors.

Did you know: Simons, one of the nation's foremost philanthropists, has donated tens of millions of dollars in recent years to autism and brain-tumor research and to support the study of math and sciences.

© Tim Sloan/AFP/Getty Images

No. 2: John Paulson

Earnings: $1.9 billion
Age: 53
Firm: Paulson & Co.
Headquarters: New York
Rank Last Year: No. 1

Paulson's firm, with various merger funds returning between 6% and 13% in 2008, was the largest shareholder of Anheuser Busch at the time of its acquisition by Belgian brewer Inbev last fall.

Did you know: Remarkably, Paulson's big paycheck last year was a steep decline from his earnings in 2007, when he pulled in a record $3.3 billion by shorting securities on the ABX, an index that tracks the strength of the subprime mortgage market.

© Carlos Sanchez/Bloomberg News/Landov

No. 3: John Arnold

Earnings: $1 billion
Age: 35
Firm: Centaurus Energy
Headquarters: Houston
Rank Last Year: No. 9

Centaurus Energy returned an estimated 80% last year (after accounting for its steep fees of 30% of profits and 3% of assets).

Did you know: Arnold has been the youngest member of the Wall Street's Highest Earners club for three consecutive years, earning an estimated $2.5 billion over that stretch.

© AP Photo/Koji Sasahara

No. 4: George Soros

Earnings: $800 million
Age: 78
Firm: Soros Fund Management
Headquarters: New York
Rank Last Year: No.2

Click here to see Tech Ticker's interview series with George Soros.

Soros, whose own assets compose a significant portion of his flagship Quantum Endowment Fund, made twice as much last year from the appreciation of his personal capital than from his share of the firm's collected fees.

Did you know: Soros, a former investor in Major League Soccer, was also a member of a group that bid on baseball's Washington Nationals before the team was ultimately awarded to fellow billionaire Ted Lerner in 2006.

No. 5: Ray Dalio

Earnings: $470 million*
Age: 58
Firm: Bridgewater Associates
Headquarters: Westport, Conn.
Rank Last Year: No. 10

Dalio's $40 billion Pure Alpha funds returned 8.7% and 9.4%, respectively, last year. That more than offset losses from his All Weather fund, which declined by 24%.

Did you know: In a recent letter to investors, Dalio offered a new take on how to avoid dramatic economic downturns in the future. His suggestion: Kids should play the board game Monopoly from an early age.

*Does not include earnings from assets managed by Bridgewater outside of its hedge funds.

Click here for the full list of Wall Street's 20 Highest Earners