Archive for the ‘Paulson’ Category

Top Hedge Fund Managers of 2009

Wednesday, March 9th, 2011

Hedge fund pay has always been astounding, but few realize that it is only a handful that make over $1 billion per year.  BBC recently released a report highlighting some of the most successful alternative asset managers in the world, which include David Tepper, George Soros, Steve Cohen, Edward Lampert, and Ken Griffin.

According to BBC, HF managers “wouldn’t even consider getting out of bed for the $13m (£8m) Goldman Sachs’ boss Lloyd Blankfein was paid last year. Such a trifling pay packet represents just a few days’ work for these staggeringly well-paid financial executives. If bankers inhabit a different world, says London-based headhunter John Purcell, “these guys are out on their own in a different universe”.

‘Private bunch’

So just how much do these guys – for the vast majority are men – earn each year? At the very top of the pile, we’re talking $4bn. Just in case that hasn’t quite registered yet – that’s four billion dollars. This does, of course, include bonuses and fees as well as salary. In fact, the salary is a tiny fraction of their overall pay. And who are these men? They are called hedge fund managers – in other words, they are investors who buy and sell all manner of financial instruments with the express aim of making money for their clients, and for themselves. Finding out much about them is notoriously difficult. ”They’re a very private bunch,” Mr Purcell explains, “largely because they earn so much. They are highly secretive in every aspect of what they do.” Discovering how they make their money is a little easier.

Popular myths

Hedge funds are actually one of the most misunderstood of all financial products. They get something of a bad rap, largely due to some spectacular failures, most notably Long Term Capital Management, which blew up in 1998 and almost took Wall Street with it, and Amarinth Advisors, which lost billions of dollars in a few weeks on bad natural gas trades in 2006. Many have also tried to blame them for some of the excessive risk-taking they say triggered the global financial crisis, but with little success. As one industry insider argues, hedge funds are worth around $1.5 trillion in total – “less than the assets that some individual banks have on their books”. Hedge funds, then, are not the the gung-ho, high-risk beasts of popular mythology. In fact, the majority are quite the opposite, seeking to produce what are called absolute returns – those over and above what you get from the bank, risk free – year in, year out. In other words, they are designed to be low risk. What sets them apart from most investment funds is the range of instruments they can use and the strategies they can employ. Whereas traditional fund managers buy shares and bonds in the hope that they will rise in value, or occasionally dabble in financial derivatives, their hedge fund counterparts can do so much more. For example, they can take advantage of movements in interest rates and currencies, company restructuring and bankruptcies, and pricing anomalies across different markets. One of their most important strategies is shorting – borrowing shares to sell into the market in the expectation that they will fall, then buying them back at the lower price. This means they can make money when markets fall.

Results business

This investment freedom is what attracts so many investment managers to hedge funds. That and the quite extraordinary sums of cash that the very best can earn, of course. In fact, many are not ready for the challenge. Encouraged by potentially huge fees, they begin running portfolios without the necessary knowledge and experience of the strategies they employ. As a result, many come unstuck. And this is one reason why it is rather unfair to compare directly the pay of hedge fund managers with that of bankers. For there is a very crucial difference – hedge fund managers get paid bonuses only when they make money. In other words, there is no reward for failure in this highly competitive business. Salaries in the industry are not dissimilar to those paid in investment banking, so to make seriously mind-boggling amounts of cash, managers need their performance-related fees. These typically amount to 20% of any returns made on a portfolio above a set benchmark, and this is how hedge fund pay rockets into the stratosphere and beyond. But for those that make no returns, through no one’s fault but their own, of course, the rewards are less attractive. In fact, the large number of managers who set up on their own don’t even have a salary to fall back on, although they do take a 2% management fee on the funds they manage. For this reason, “a lot of managers are not making any money at all,” says the industry insider. Equally, hedge fund managers invariably have their own money invested in the funds that they run, unlike bankers who generally stake other people’s cash. ”Investors are very keen to see the fund management company have ‘skin in the game’,” says Mr Purcell.

Celebrity pay

It’s also important to bear in mind that the very best-paid hedge fund managers – the John Paulsons and George Soroses of the industry – own their own companies. They take a cut on all the assets under management across a number of funds run by their firm. In other words, George Soros owns Soros Fund Management. By contrast, Lloyd Blankfein does not own Goldman Sachs. And while it’s relatively easy to find out what the boss of a public company owns, it’s far harder to discover what the owner of a private company pays him or herself. Individual hedge fund managers actually earn a fraction of what their employers earn – on average $4.9m in 2007, the last year for which figures are available. Still, nice work if you can get it. In fact, when it comes to comparisons, bank bosses are nowhere near the best paid executives of even publicly-listed companies. H Lawrence Culp Jnr, boss of US manufacturing and technology group Danaher, was paid $141m in 2009, while Larry Ellison, head of technology giant Oracle, got $130m, according to Forbes. Not even sports starts or actors can match that – Tiger Woods, for example, earned $91m, while Johnny Depp pulled in $75m. In the UK, the boss of consumer goods group Reckitt Benckiser, Bart Becht, was awarded £93m ($148m), while Sir Terry Leahy, outgoing chief executive of supermarket group Tesco, earned £18m, according to research company IDS.

Charitable giving

Staggering sums they may be, but they pale into insignificance compared with the multi-billion dollar packages the very top hedge fund managers earn. It is important not to forget the huge amounts in tax that those managers not based in tax havens, of which there are many, pay. Many also donate vast sums to charity and have become well-known philanthropists. Carl Icahn, for example, who earned $1.3bn in 2009, recently signed up to the Giving Pledge, a club of billionaires who have promised to give large chunks of their wealth to charity. Still, whichever way you look at it, $4bn sure is a lot of dough for one man to be earning over many lifetimes, let alone one year.

Are they worth it?

No doubt a good number of their clients, which include many the world’s biggest pension funds, will say that they are. Their tailors may well agree. Others may take a slightly different view.

Hedge fund rich list 2009

Hedge fund manager Hedge fund group Earnings
SOURCE: AR MAGAZINE
David Tepper Appaloosa Management $4bn (£2.5bn)
George Soros Soros Fund Management $3.3bn
James Simons Renaissance Technologies $2.5bn
John Paulson Paulson & Co $2.3bn
Steve Cohen SAC Capital Advisers $1.4bn
Carl Icahn Icahn Capital $1.3bn
Edward Lampert ESL Investments $1.3bn
Ken Griffin Citadel Investment Group $900m
John Arnold Centaurus Advisors $900m
Philip Falcone Harbinger Capital Partners $825m

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Wing Chau Sues Author of the Big Short!

Tuesday, March 1st, 2011

People have no SHAME.  Wing Chau, president of Harding Advisory is suing Michael Lewis, the author of The Big Short for “unfairly casting him as a villain.”  Listen Wing, you cheated investors and blatantly ignored your fiduciary responsibility.  Give it a break.

In his book, Lewis writes about a handful of Wall Street outsiders who realized the subprime mortgage business was a house of cards and found a way to bet against it, making billions for themselves.  He also discusses the perpetrators and poor underwriters that were the cause of the subprime collapse:

“Author Michael Lewis was sued by Wing Chau, president and principal of Harding Advisory LLC, who accused the writer of defaming him in his 2010 book “The Big Short: Inside the Doomsday Machine.”

Chau, a manager of collateralized debt obligations, according to a complaint filed Feb. 25 in NY federal court, claims the book unfairly casts him as one of the “villains” responsible for the 2008 financial collapse.

The book “depicts Mr. Chau as someone who ignored his professional responsibilities, made misrepresentations to investors, charged money for work that was not performed, had no stake in the CDOs he managed, was incompetent or reckless in carrying out his responsibilities, and violated his fiduciary duties by putting the interests of ‘Wall Street bond trading desks’ above those of his investors,” according to the complaint.

Also named in the suit, which seeks unspecified damages, are the book’s publisher, W.W. Norton and Steven Eisman, managing director of FrontPoint Partners LLC, whom Chau describes in the complaint as “one of the principal sources Lewis relied on in writing ‘The Big Short.’”

Lewis, a columnist for Bloomberg News, didn’t immediately respond to an e-mail seeking comment on the suit. Norton spokeswoman Elizabeth Riley had no immediate comment

The case is Chau v. Lewis, 11-cv-1333, U.S. District Court, Southern District of (Manhattan).”

To contact the reporter on this story: Bob Van Voris in New York.

Complaint Against Michael Lewis

Paulson Proves He is Not “One Hit Wonder,” Pulls in $1.25 billion for 2010

Sunday, January 2nd, 2011

 

After being bashed by many hedge fund managers as a “one hit wonder,” Paulson closed well in 2010, putting another strong year under his belt.  The Paulson Advantage Fund was up 14% at the end of 2010 (after being down more than 10% earlier).  His largest stakes were in Hartford Financial Services, MGM, and Boston Scientific.  The Paulson Gold Fund also performed well, given the runup in physical commodities this year.  After outperforming many of his competitors, it is rumored that the hedge fund manager will earn $1.25 billion for himself this year.  It is also interesting to see the divergence in HF manager earnings in the U.S. versus the U.K…

According to Daily News UK, “multi-billionaire US hedge fund manager John Paulson, who pulled off one of the biggest coups in Wall Street history when he made £2.3bn by betting against the sub-prime housing market, is showing the Midas touch again writes Edward Helmore from New York. 

Initial reports suggest his firm, Paulson & Co, has made returns of nearly treble the industry average of 7 per cent in 2010, giving him a personal gain estimated at more than £800mm ($1.25 billion). 

That would eclipse even the biggest earners on the UK hedge fund scene, based in London’s swish Mayfair district.

Colm O’Shea of fund group Comac is reported to have made nearly £10mm last year as did Jonathan Ruffer, of the eponymous investment company. 

Crispin Odey, founder of Odey Asset Management took home £36.4mm. ”

According to Dealbook, “two years after Mr. Paulson pulled off one of the greatest trades in Wall Street history, with a winning bet against the overheated mortgage market, he has managed to salvage a poor year for his giant hedge fund with a remarkable come-from-behind showing.

Defying those who said his subprime success was an anomaly, Mr. Paulson appears to have scored big on bets he made on companies that would benefit from an economic rebound.

In less than three months, his flagship fund, the Paulson Advantage Fund, has turned a double-digit loss into a double-digit gain. At mid-December, the fund, which was worth $9 billion at the start of the year, was up about 14 percent, according to one investor in the fund who provided confidential figures on the condition of anonymity.

It is a remarkable turnabout for Mr. Paulson, whose winning gamble against the housing market plucked him from obscurity and transformed him into one of the most celebrated money managers in the business.

What precisely propelled the sharp rebound in Mr. Paulson’s hedge fund is unclear. A spokesman for Paulson & Company declined to comment, and regulatory filings of significant changes made to Mr. Paulson’s funds typically lag behind by several weeks.

But it is clear that several of Mr. Paulson’s largest stakes — in Hartford Financial Services, MGM Resorts and Boston Scientific — went on a tear in the final quarter of the year, with gains of 16 percent, 30 percent and 26 percent, respectively.

“Several of his general investment themes this year came to fruition,” the investor in the Paulson Advantage Fund said.

Mr. Paulson stands out in what may go down as a lukewarm year for many hedge fund managers. The average return for funds through the end of November was 7.1 percent after fees, according to a composite index tracked by Hedge Fund Research of Chicago. Investors would have done better buying a low-cost mutual fund that tracks the Standard & Poor’s 500-stock index, which rose 7.8 percent during that period.

With volatile markets creating uncertainty for hedge fund managers this year, some investors are surprised that these funds did even that well. But they expect the funds to continue to attract money from investors, particularly state pension funds seeking higher returns to offset their budget shortfalls.

“When investors look back at the year they’re going to be pretty happy,” said David T. Shukis, a managing director of hedge fund research and consulting at Cambridge Associates, which oversees $26 billion in hedge fund assets for clients.

But the lackluster performance has other people wondering: are hedge funds worthwhile? The high fees and muted returns — and a long-running federal investigation into insider trading in the industry — has cast a cloud over a business that long defined Wall Street wealth.

“A client told me the other day that paying these ridiculous fees for single-digit returns, then worrying about these investigations — it’s just not worth it,” said Bradley H. Alford, chief investment officer at Alpha Capital Management, which invests in hedge funds. “A lot of these things you can sweep under the rug when there are double-digit returns, but in this environment it’s tougher.”

This year, bets by hedge fund managers were whipsawed by the stock market “flash crash” in May; the European debt crisis; frustration with the Obama administration over what many in the business viewed as anti-Wall Street rhetoric; and the Federal Reserve’s unusual strategy of buying bonds in the open market to hold down interest rates.

“It was an interesting year where you had to have a couple of gut checks,” said David Tepper, founder of Appaloosa Management, whose Palomino fund, which invests largely in distressed debt, was up nearly 21 percent at the end of October, according to data from HSBC Private Bank.

“If you had those gut checks, looked around and made the right decisions, you could make some money,” Mr. Tepper added.

There are still many hurdles for the industry to clear, including the insider trading investigation, lingering difficulty in raising money, and the liquidity demands from investors still fuming over lockups in 2008 that denied them access to their cash.

Some hedge fund notables will probably remember 2010 as a year they would like to write off. For instance, Harbinger Capital, run by Philip A. Falcone, was down 13.8 percent at the end of November, according to HSBC’s data.

But the Third Point Offshore fund, run by Dan Loeb, was up 25 percent for the year through November after it made successful bets on one of Europe’s largest media operators, ProSieben, and Anadarko Petroleum, according to a report obtained from an investor in the fund.

Other big names also fared well. SAC Capital Advisors, run by Steven A. Cohen, was up about 13 percent in its flagship fund, one of his investors said.

A handful of other usual suspects turned out solid performances this year too, according to investors in their funds: David Einhorn notched a 10.5 percent return at his Greenlight Capital hedge fund through November, raising the fund’s total to $6.8 billion.

And after two consecutive years of losses, James Simons, the seer of quantitative hedge funds, was up 17 percent in his two public Renaissance funds, which now collectively manage $7 billion.

The figures reflect performance after fees through November, and do not take into account the strong market rally in the final month of the year, some investors noted.

For many, being in the right sectors of the market — distressed debt and emerging markets, for instance — paid off handsomely.

“If you look at how some of the distressed managers performed, you’re seeing some really good returns among a number of funds,” said David Bailin, global head of managed investments at Citi Private Bank.

Bets on distressed debt produced a return of more than 19 percent as of the end of October for the Monarch Debt Recovery Fund, overseen by a pair of former Lazard managers. Similarly, Pershing Square, a fund run by William A. Ackman, was up 27 percent after fees through the end of November.

Mr. Ackman’s big win was a bet on the debt of General Growth Properties, a developer that emerged from bankruptcy last month.

It was a bumpy year for Mr. Paulson who, besides making a huge bet on gold — which rose 30 percent — also took large stakes in several companies he believed would benefit from a sharp recovery in the economy, including banking and financial services companies.

But as the economic recovery sputtered along, Mr. Paulson’s portfolio sank, prompting some critics to claim that his funds had become too big to manage. Some of Mr. Paulson’s investors asked for their money back around midyear.

At one point this summer, in fact, other hedge fund managers were selling short stocks Mr. Paulson held in his funds, betting that redemption requests would flood in and that he would be forced to sell down some of his big positions, according to a hedge fund trader at another firm who declined to be named for fear of damaging business relationships. He said investors were making similar bets against stocks held by Mr. Falcone’s Harbinger fund.

As recently as the end of September, Mr. Paulson’s flagship Advantage Plus fund was down 11 percent. As of last week, the fund was up more than 14 percent for the year. (His clients are mostly institutions that invest a minimum of $10 million in the fund.)

Patience paid off for Mr. Paulson as many bets he made late last year and early this year finally shot higher in the last quarter.

This year, Mr. Paulson bought 43 million shares of the gambling company MGM, whose shares have soared more than 30 percent since the end of September. A bet of 40 million shares in the cable giant Comcast has risen 22 percent this quarter.

Shares of Boston Scientific, of which Mr. Paulson owns 80 million shares, have skyrocketed 26 percent, and his 44 million shares of Hartford Financial Services climbed 16 percent in the quarter.

One of Mr. Paulson’s newer positions, a stake in Anadarko Petroleum, moved up 20 percent in the quarter.

With the last-minute rally, Mr. Paulson saved himself from being the headliner among flat funds this year. Most were not so fortunate, with many hedging against their stakes late in the year, expecting that stocks would end the year down. That move, some say, probably limited their gains.

“Psychology is such a fragile thing,” said William C. Crerend, the chief executive of EACM Advisors, which oversees a $3.6 billion fund for Bank of New York Mellon.”