How much do Hedge Fund Managers make?

Written on May 27, 2008 by OptionsRopeaDope

Perhaps you’ve heard of John Paulson, who made $3 Billion last year for the performance of his funds by spotting the problem with sub-prime mortgages n the US, and shorting as much as he could. One - just one - of his funds started the year with $130 million and finished with over $3 billion by the time the year was finished acording to Trader Monthly magazine.

Or maybe George Soros, rumored in one case to have made 1 billion dollars in a single day betting against the British Pound. The fact is hedge fund managers make a bunch. Or Carl Ichann, trying to pick up one blue chip arter another on the cheap.

After some curiosity and a little poking around I was able to find a formula or two for how they are paid and thought I’d pass it on. The most common formula is “2 and 20″, or “2-20″. This means that from the capital in the fund, a 2% management fee is takend off the top. Afterwards, all the profits in the fund are split 80-20 - 80% to the investors, and 20% to the fund managers. Carl Ichann is apparently in that club.The idea is, no profit, no bonus.

More aggressive funds, which appeart to have the possibility for greater returns, implement a “3-30″ fomula, and I’ve even found one that is “5-50″.

Are they worth it? One big difference from a regular mutual fund is that in general, the “performance bonus” is not tied to market or index returns (unlike for many mutual funds), so there’s incentive to turn a profit no matter what is happeneing in the market.  The return does need to be pretty fat from the start of course to overcome the bonus, and many times those returns can’t be achieved without taking on significant leverage, which means the risk for a big loss can make you sick.

Make your own call, just passing this on!

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