The rich are different from you and me. They run hedge funds.
Care to know why? Let's go where it matters most on Wall Street - to the numbers. In 2001, a year in which the Standard & Poor's 500 index fell by 13 percent and burned investors raised a hue and cry that brought a raft of state and federal subpoenas, no fewer than 11 hedge fund managers earned more than $100 million. Leading our first-ever list of the top hedge fund earners is the ever-voluble George Soros, who took home at least $700 million - and he's semiretired. Soros had some pretty flush company, according to our calculations: Caxton Corp.'s Bruce Kovner, ESL Investments' Edward Lampert and SAC Capital Advisors' Steven Cohen all earned more than $400 million.
And you wonder why so many hedge funds - 6,000 today, or three times more than existed a decade ago - are being started nowadays?
Simply put, hedge fund managers are redefining wealth on Wall Street. By comparison, investment bankers, even those who still have jobs, are paupers. Last year Goldman, Sachs & Co.'s Henry Paulson Jr. took home $12.2 million, Merrill Lynch & Co.'s David Komansky earned $12 million, and Morgan Stanley's Philip Purcell made $12.8 million. None of these high-powered CEOs, who run vast global enterprises, would have made our list.
Successful hedge fund managers, of course, have always done rather nicely, thank you. Soros supposedly reaped a cool $1 billion from shorting the British pound in 1992. But since 1998, as hedge fund assets have soared and the number of funds themselves have proliferated, more and more managers have begun to enjoy mind-boggling paydays.
In one sense, the money is well deserved. The great selling points for hedge funds are diversification and the ability of top managers to produce consistent returns that are uncorrelated to the markets - in good times and bad. And many of the managers, like Lampert, whose gross returns touched 66 percent in 2001, had outstanding years.
But these star managers' incomes also pile up in a hurry, thanks to the bounties of hedge fund math, the sweetest thing to hit finance since compound interest. Hedge funders make their money through a combination of management fees and performance incentives, as well as from the increase in their own capital, which most simply plow back into their funds.
The standard management fee is 1 percent. But managers command 20 percent - and sometimes much more - of a fund's gains as their performance fee. To enroll in SAC Capital Advisors' flagship fund, investors pay Cohen perhaps the highest incentive fee in the industry: 50 percent of gross annual performance. And yet investors are clamoring to get into the fund, which had a 60 percent return last year: Thanks to his fee structure, Cohen took half of that, leaving investors to net 30 percent on their money.
So the more money a hedge fund manager runs and the better he performs, the richer he (and, yes, it's virtually all men) grows.
Our formula for determining the most handsomely compensated managers is based on knowledgeable estimates of their share of management and performance fees and also includes (where available) our calculations of the gains on their own investments in their funds. Thus Cohen's $428 million windfall includes the return on the nearly $1 billion or so of his own capital that we estimate is invested in SAC Capital's funds. In all cases, we chose the most conservative of estimates; the earnings we show in the following pages reflect the minimum these managers are likely to have made in 2001.
Hedge funds aren't just enriching their managers, of course. Wealthy investors, as well as pension funds and foundations, have reaped great benefits from entrusting their money to the individuals who appear on our list. From 1996 to 2000, for instance, Lee Ainslie III's Maverick Capital had an average annualized return of 27.68 percent, compared with 18.33 percent over the same period for the S&P 500. His 5.2 percent return last year was still impressive, given that the S&P 500 was down 13 percent.
Tudor Investment Corp., run by veteran manager Paul Tudor Jones II, contributed the most names to the list: Jones himself, James Pallotta, who heads up the firm's U.S. equities investments, and Dwight Anderson, who runs Tudor's Ospraie Funds. This trio raked in at least $170 million.
Julian Robertson's now defunct Tiger Management Corp., however, sired the most names on the list. Seven of the 30 we profile once worked for the firm: Ainslie, Anderson, Blue Ridge Capital's John Griffin, Viking Capital's O. Andreas Halvorsen, Joho Capital's Robert Karr, Lone Pine Capital's Stephen Mandel Jr. and Intrepid Capital Management's Steven Shapiro.
"I'm very proud of what they have accomplished," says Robertson of his professional progeny. "Our selection process was pretty good. They would have done well wherever they worked." He adds that it was no coincidence that Tiger-trained hedge fund managers were among the most successful last year. "We had a real, true hedge fund mentality," he says. "You couldn't do well [last year] without hedging techniques."
But the truth is that all sorts of strategies scored big. Day trader Cohen plays in nearly every market and style, except merger and interest rate arbitrage; Caxton's Kovner cashed in on last year's rate cuts; Renaissance Technologies Corp.'s James Simons used abstruse mathematical models to exploit inefficiencies in several markets, gaining 33 percent net of fees for his Medallion fund and earning himself at least $200 million; and Highbridge Capital Management's Glenn Dubin and Henry Swieca made $45 million apiece thanks to the surging convertible securities market.
Whatever their style, most of these hedge fund managers, who love what they do, would likely agree with William Hamilton's cartoon character in The New Yorker who explained: "The point is to get so much money that money's not the point anymore."
Soros Fund Management
In recent years the man who broke the Bank of England has become better known for philosophizing and philanthropy than for profit making. But that doesn't mean that George Soros has lost his touch.
To be sure, after producing average annual returns of 31 percent over 32 years in his Quantum Fund, Soros backed away from the market in 2000 during a bad patch for macro investors that saw the celebrated Julian Robertson fold his tent. Soros merged his flagship Quantum Fund with the Quantum Emerging Growth Fund to form the Quantum Endowment Fund after he lost money and was hit by investor withdrawals.
Now Soros' company is running $7 billion, down from some $22 billion in the late 1990s, when it was posting stellar gains generated by star managers like Scott Bessent, Stanley Druckenmiller and Nicholas Roditi, all of whom have left the company in the past two years. With much of the current stash his own, Soros made a mint when his new managers posted a gain of 13 percent in 2001.
Soros continues to make waves in the public arena, as he did during an April promotional talk for his new book, George Soros on Globalization, when he criticized the Bush administration. "If we assess the foreign policy accomplishments of the Bush administration since September 11, the scorecard is quite dismal," Soros was quoted as saying in the Philadelphia Inquirer. "There are some people in the Bush administration who have the same mentality as Arafat or Sharon. I can name names, like Ashcroft, Cheney and Rumsfeld, although that is considered impolite."
Most of the time, though, the 71-year-old is handing out money to causes that promote democracy and economic growth in developing nations. His many foundations have doled out about $500 million annually over the past few years.
Soros' story is well known by now. Born in Budapest in 1930, he survived the Nazi occupation of his hometown and left communist Hungary in 1947 for the U.K., where he graduated from the London School of Economics in 1952. While a student at the LSE, Soros became familiar with the work of philosopher Karl Popper, which had a profound influence on his thinking and later on his professional and philanthropic activities. In 1956 Soros moved to the U.S., where he launched Soros Fund Management.
Equally comfortable speculating in currencies and futures or playing stocks, macro maven Bruce Kovner steered his $5.5 billion through last year's volatile markets to net gains of about 30 percent in the three offshore funds he runs: Caxton Global Investments, Essex and GAMut Investments. The eye-catching performance largely came courtesy of a big leveraged bet in the fixed-income market, which Kovner rode as the Federal Reserve Board cut interest rates 11 times.
Kovner charges a management fee of 2 percent and a performance fee of 25 percent. That's not bad for a fellow who didn't plan to pursue a career in the investing world. After receiving his BA from Harvard in 1966, he studied until 1970 at what is now the John F. Kennedy School of Government, but did not complete his Ph.D. From 1970 to 1976 Kovner was a consultant to the Republican Party, the National Science Foundation and the Council of Environmental Advisors for the State of New York.
In 1977 he launched his trading career at Princeton, New Jersey-based futures trading firm Commodities Corp., where he was a quick success trading futures contracts. He left in 1983 to start Caxton. In 1999 he shelled out a reported $17.5 million to purchase the red-brick town house on Fifth Avenue that had been the headquarters of the International Center for Photography , for his new home. An accomplished harpsichordist, Kovner became chairman of the board of trustees of New York City's famed Juilliard School in 2001.
By anyone's standards Eddie Lampert turned in a pretty stunning performance last year: a 53 percent net return. That's even more impressive when you consider that Lampert mainly buys big chunks of stock, and the Standard & Poor's 500 index sank by 13 percent. But in another sense it's not too surprising: Since the 39-year-old launched Greenwich, Connecticut-based ESL Investments in 1988, his hedge funds have swelled by an average of 24.5 percent per year, nearly double the performance of the S&P 500.
Lampert has great faith in his convictions. About 85 percent of his $5 billion in assets is said to be concentrated in fewer than ten stocks. And they are rarely the hot stocks du jour. The value investor prefers to own businesses he understands. These include a 24 percent stake in AutoZone, an auto parts retailer he has invested in since January 2000. Lampert, in fact, was recently appointed to its board of directors.
A onetime arbitrageur for Goldman, Sachs & Co., he was partially funded by famed investor Richard Rainwater before they had a falling out. He counts the Ziff billionaire publishing family and music mogul David Geffen among his early investors.
Lampert graduated summa cum laude from Yale University in 1984 with a bachelor's degree in economics before joining Goldman that year.
SAC Capital Advisors
No one dislikes the term "day trader" more than Stevie Cohen. But how else to describe the extraordinarily successful yet intensely hyperactive, in-and-out trading style of this hedge fund superstar? Cohen, say sources, typically turns over his multibillion-dollar portfolio numerous times in a quarter as he plays in just about every strategy, except for merger and interest rate arbitrage.
Required filings with the Securities and Exchange Commission reveal that Cohen's biggest equity positions in the fourth quarter of 2001 included AOL Time Warner, Bristol-Myers Squibb Co., Kroger Co. and Pharmacia Corp. At the end of the third quarter, his biggest holdings included Inhale Therapeutic Systems, Loews Corp., Merrill Lynch & Co., Tyco International and Zimmer Holdings. Certainly, he's no buy-and-hold investor, although he did maintain a roughly $34 million stake in Kinder Morgan Management in both quarters.
These days the 46-year-old former Gruntal & Co. proprietary trader, who founded his firm in 1992, trades mostly for his own and his partners' accounts, as a growing portion of the $3.7 billion the firm runs in six partnerships (three domestic, three offshore) belongs to insiders. Many top-notch funds-of-funds report that Cohen has returned their money in the past year or so.
Cohen's stunning performance in recent years - the 30 percent net return in his flagship SAC Capital fund in 2001 was his worst in the past seven years - has enabled him to command exceptionally high fees; SAC Capital Advisors does not charge a management fee, but it takes a whopping 50 percent performance fee.
Few vultures have ever dined as well as David Tepper of Chatham, New Jersey-based Appaloosa Management. But it can be feast or famine for this investor. Last year his $969 million Pal-omino offshore fund surged an astounding 67 percent; in 1998 it plunged 29 percent. And former investors say that they weren't always able to keep on top of what the Goldman, Sachs & Co. alum was up to. He played his cards close to the vest, even in the limited-partnership letters, recalls one.
Tepper, 44, who founded Appaloosa in 1993, toils in the relatively illiquid world of distressed securities - mostly high-yield bonds and bank debt - as well as in equities and preferred stocks. His equity holdings are generally very concentrated.
In 2001 he invested between $180 million and $220 million in just 12 to 17 stocks, according to quarterly SEC filings. Of those, the Carnegie Mellon MBA held five investments for the entire year - Beverly Enterprises, Edison International, Inamed Corp., LTC Properties and Mesabi Trust. And they were mostly home runs. Shares of LTC, a health care REIT, and Edison, a California utility, more than doubled from their intrayear lows, while Inamed, a medical-devices company, nearly doubled.
Even in tough times Richard Perry can find a way to make his favorite plays work for him. The 47-year-old, who runs $4.1 billion in two hedge funds and two offshore funds, has never had a down year, racking up double-digit returns in ten of the 13 full years he has been managing his flagship Perry Partners funds.
Consider last year, when the corporate deal market - the lifeblood of his brand of merger arbitrage - all but dried up. Perry still managed to record gains of 13.7 percent in Perry Partners, net of his 1 percent management fee and 20 percent performance fee.
Perry is comfortable hunting for inefficiencies in a variety of markets. Although the three areas he specializes in - mergers, distressed securities and event-driven situations - were profitable for Perry in 2001, he did especially well investing in the securities of troubled companies. He also scored with European companies undergoing mergers, restructurings and bankruptcies, returning 22 percent or so for the Perry European Fund Ltd. and its domestic version, Perry European Fund L.P.
Perry, who has a BA from the University of Pennsylvania's Wharton School and an MBA from New York University, left Goldman, Sachs & Co. in 1988 to found Perry Capital.
Renaissance Technologies Corp.
Only Jim Simons could manage to chalk up a 33 percent gain - and see his historical average decline. But that is exactly what happened last year to the brainy founder of Renaissance Technologies Corp., whose $5.2 billion Medallion fund had registered annual returns greater than 36 percent since its inception in 1988, or more than double the record of the Standard & Poor's 500 index. Such performance from Simons, who closed his smaller Equimetrics fund in March, doesn't come cheap. Based in East Setauket, Long Island, Simons has been charging a 5 percent management fee, plus 20 percent of returns; beginning this year that performance fee will jump to 36 percent for outside investors.
The prize-winning mathematician and son of a shoe factory owner is known for his sophisticated computer models and has surrounded himself with Ph.D.s in science and math as he tries to uncover small, brief anomalies in an otherwise efficient market. "We don't hire people from business schools, we don't hire people from Wall Street," he told Institutional Investor in a November 2000 profile. "We hire people who have done good science."
His 2001 performance came from most of the asset classes he trades, ranging from futures to equities, say people who know. But leverage also played a major role. In the second half of last year, Simons had about $7.5 billion in his stock portfolio. It swelled to nearly $9 billion invested in 1,357 issues at the end of the first quarter of 2002. His biggest holdings as of his year-end 2001 filing: American International Group, AOL Time Warner, Exxon Mobil Corp., Fannie Mae and Pfizer.
Citadel Investment Group
Take a strong year for convertible bonds and risk arbitrage, throw in the most sophisticated infrastructure in the hedge fund business, then add some leverage. What do you get? Another good year for Ken Griffin, the founder and CEO of Chicago-based Citadel Investment Group. Last year the 33-year-old wunderkind led Kensington Global Strategies, his $4.2 billion offshore portfolio, to a 19 percent return, and Wellington Partners, its $1.5 billion domestic counterpart, to a 21 percent gain.
Griffin, who runs just over $7 billion, arguably earns even more than his performance fees suggest. Unlike other hedge fund operations, Citadel expenses all costs to investors, allowing Griffin to spend more freely on staff and systems. So far the unusual system has paid off mightily for all concerned. In fact, he has made $3.5 billion in appreciation for investors since inception.
Griffin trades in up to 15 different strategies, including convertible bond arbitrage and risk arbitrage. In the past year he started a long-short equity operation in San Francisco and recently hired several former Enron Corp. quantitative analysts to explore a push into energy trading.
Griffin started early, running two small partnerships out of his dorm room at Harvard College, where he earned a BA in economics. Before launching Citadel in 1990, he briefly ran a convertible arb portfolio for Chicago-based Glenwood Investment Corp.
Trout Trading Management Co.
Talk about going out on top. After a 13.6 percent return in 2001, 40-year-old commodities trader Monroe Trout decided to retire and sell his firm, Trout Trading Management Co., to CEO Matthew Tewksbury, who renamed it Tewksbury Capital Management.
The 6-foot-8 Trout, who captained the Harvard College basketball team to a third-place finish in the Ivy League in 1984, got his first job as a futures trader when he was 17 from a neighbor. Trout, who graduated magna cum laude, wrote his college senior thesis on the stock index futures market.
Since launching his fund in 1988, Trout has tallied average annualized returns of 21.5 percent. With $3 billion under management at year-end, he charged a hefty 4 percent management fee and 22 percent of returns. The New Canaan, Connecticut, native moved his firm from Chicago, the unofficial commodities capital, to Bermuda.
Although Trout got his start and made his reputation trading commodities, he dabbled in just about everything, including currencies, stocks and bonds, as his fund swelled in size, relying heavily on his big investment in technology to execute statistical trading strategies. The firm notes on its Web site that it operates 24 hours a day, Sunday night through Friday night, ostensibly so it can actively trade in markets throughout the world.
Millennium International Management
Israel Englander prefers to toil in obscurity. The 53-year-old arbitrageur runs Millennium International Management, whose $2.9 billion in the offshore Millennium International Fund and domestic hedge fund Millennium U.S.A. scored a 15.5 percent return in 2001, net of the 20 percent performance fee. (He does not charge a management fee.) Englander had recorded gains of 36 percent in 2000 and more than 32 percent in 1999.
The fund manager takes a multistrategy approach, investing wherever he thinks he can make money. Over the years he has favored arbitrage strategies - particularly plays in risk arb, mortgage-backed securities and convertibles (the latter enjoyed a splendid 2001). He also will go long or short individual stocks when he spots anomalies.
Englander, who owns several specialist firms on the floor of the American Stock Exchange that together make a book in more than 100 stocks, got an unwanted taste of notoriety in 1988 when he was dragged into the headlines during an insider trading scandal. John Mulheren, his partner at the now defunct arb firm Jamie Securities - whose investors included the Tisch and Belzberg families - was charged with orchestrating illegal stock trades for arbitrageur Ivan Boesky. Shortly after the scandal broke, Mulheren was arrested while carrying a rifle and fatigues, allegedly on his way to shoot Boesky. Mulheren's conviction in the case was later reversed and the securities manipulation charges against him were dismissed, but by then Jamie Securities had begun to disband.
Inscrutable Japanese markets have taken down legions of investors since the late 1980s. Not hedge fund manager Robert Karr, who year after year plays them like a fiddle. Last year's performance: 35 percent.
Little known even among the hedge fund set, Karr specialized in Asian securities at New Japan Securities and Mitchell Hutchins Asset Management in New York City before taking his expertise to Tiger Management Corp., where he ran the Tokyo operation for three years. In 1996 he launched New York City,based Joho Capital, which currently manages $2 billion in two hedge funds, one of them offshore.
With a focus on the Japanese market, Karr generally sticks to good old-fashioned stock picking, on the long and the short side. And that's pretty much how he produced those impressive 2001 returns. Unlike many other hedge fund managers specializing in Asia, Karr eschews currency bets and rarely dabbles in index futures, so last year's popular Asian strategies - yen and Nikkei index shorts - were not among his approaches.
Karr, 39, has an undergraduate degree from Stanford University and an MBA from Harvard Business School.
STEPHEN MANDEL JR.
Lone Pine Capital
Maybe Stephen Mandel Jr. is losing his touch. Last year his five hedge funds rose by 51 percent, net of his 1 percent management fee but before his performance fee, which ranges from 15 to 20 percent depending on the client. That's outstanding for mere mortals - but a drop-off for Mandel. In 2000 his funds were up 58 percent, and in 1999 they rose 94 percent.
Mandel is no market timer, and he trades infrequently, so how does the former Tiger Management Corp. retail analyst do it? Diversification and a heady mix of astute long and short picks. In 2001 Mandel was between 30 and 40 percent net long - his typical range - spread over several broad industry categories, including consumer, financial, health care, media, industrial, technology and telecommunications. And although he has had good success shorting tech stocks, Mandel is actually always net long on the sector.
Mandel, who has named all of his hedge funds after evergreen trees, left Tiger, where he specialized in retail and other consumer stocks, in 1998 to form Lone Pine Capital. Known for his generosity to his partners and employees, Mandel, 46, runs $4 billion after returning $500 million to his investors at the beginning of this year.
PAUL TUDOR JONES II
Tudor Investment Corp.
Onetime cotton trader Paul Tudor Jones II first won renown for calling the 1987 stock market crash and riding a big short position to a spectacular 201 percent gain. Since then he has made a name for himself on the charity circuit through his 14-year-old, celebrity-friendly Robin Hood Foundation. After September 11 Jones quickly rounded up Paul McCartney, Mick Jagger, Billy Crystal and Meg Ryan and put on a concert at New York's Madison Square Garden, raising $33 million for victims of the attacks.
Memphis-born Jones, whose Tudor Investment Corp. runs roughly $5 billion in nine offshore and domestic hedge funds, hasn't lost his feel for the markets. One of a diminishing breed of macro traders, Jones took the measure last year of a sinking economy by making a large play on bonds in a diversified portfolio of global fixed-income positions. When the Federal Reserve Board began cutting interest rates at the beginning of 2001, Jones scored big.
As a result, Jones racked up a 22 percent return in the $2.1 billion-in-assets Tudor BVI Global Fund, net of the 4 percent management fee and 23 percent performance fee. Meanwhile, his two Ospraie Funds, which specialize in commodities and commodity-oriented equities, rose more than 20 percent. These gains offset the nearly 3 percent loss sustained by the two equity-oriented Raptor Global Funds (no relation to Enron Corp.'s infamous Raptor partnerships).
Typically generous, the 47-year-old recently donated $20 million to the University of Virginia, where he earned a BA in economics.
Andor Capital Management
Breaking up ain't always so hard to do. Just ask Dan Benton. His unwavering bullishness on tech stocks made his partner, Arthur Samberg, squeamish, so in October the pair divided Pequot Capital Management's $15 billion in assets down the middle and went their separate ways.
Benton, who named his new company Andor Capital Management, kept chasing his tech plays and managed to steer his three main funds to double-digit net gains for the year. Andor Technology Fund, with $3.6 billion in assets, climbed 11.1 percent, while the $2.1 billion Andor Technology Perennial Fund rose 17.1 percent and the $1.2 billion Andor Technology Aggressive Fund surged 20.8 percent. For posting these numbers, Benton charged a 2 percent management fee and 20 percent of performance. Ex-partner Samberg fails to make the list; most of the funds he kept lost money in 2001.
Benton, a 43-year-old former Goldman, Sachs & Co. tech analyst, racked up better than 50 percent annual gains after joining Pequot in 1994 - roughly double the record of Samberg, who founded the firm in 1986. Benton is a bottom-up stock picker who reportedly plans to look for opportunities outside of technology as well. Postsplit, his first 13-F filing for the fourth quarter of 2001 showed Andor holding a little more than $1 billion in 53 stocks - a fraction of his overall portfolio. His largest holdings were in EBay, Genesis Microchip and Marvell Technology Group. Last fall Benton demonstrated that he is as generous as he is savvy, donating $30 million to victims of the September 11 terrorist attacks.
O. Andreas Halvorsen
How do you rack up an 89 percent net return in 2000 and then follow it with a 35 percent gain in 2001? Try shorting tech and telecom equipment stocks.
That's what O. Andreas Halvorsen did. The Norwegian native, who left Julian Robertson's Tiger Management Corp. in 1999 along with Brian Olson and David Ott to launch Viking Capital, was said by rivals to have benefited from being net short before the September 11 terrorist attacks, which caused the global stock markets to plunge when they reopened.
None of this would likely come as much of a surprise to Robertson, who is said to have valued the judgment of the former Norwegian Navy commando more than that of most of his employees. The seven-year Tiger veteran had served as director of equities.
Robertson was especially impressed with Halvorsen's knowledge of Norwegian equities. Earlier this year, however, the Norwegian high court fined the 40-year-old $100,000 for failing to report in 1997 that he owned more than 10 percent of Norwegian bank Finansbanken, according to the Financial Times. The transaction was a little tricky because it involved debt that was convertible into the bank's stock. According to the paper's account, Halvorsen was unaware he had to count the converts when figuring his stock holdings in the bank.
Blue Ridge Capital
John Griffin was considered Julian Robertson's right-hand man during the ten years or so he spent at Tiger Management Corp. Now, like many Robertson protégés, he is flourishing on his own. Last year the 38-year-old posted net returns of 22 percent on the $2.5 billion run by his New York City- based hedge fund organization, Blue Ridge Capital, which he established in 1996. Though little is known about his big scores in 2001, Griffin typically focuses only on U.S. equities.
Last year Griffin donated $500,000 to the business school at his alma mater, the University of Virginia, where he majored in finance. Over the years he has returned to teach a few classes. In 1993 Griffin established the Blue Ridge Foundation to make grants to charities. He is also a board member of the Michael J. Fox Foundation for Parkinson's Research.
Griffin received an MBA from Stanford Business School. He began his financial career as an analyst for Morgan Stanley's merchant banking group before joining Tiger in 1987.
Farallon Capital Management
All things considered, risk arbitrageur Thomas Steyer had a pretty good year in 2001 given that it was an otherwise sorry time for the mergers and acquisitions deals he lives off. The 44-year-old is senior managing member of San Francisco-based Farallon Capital Management, which runs some $7.8 billion in arbitrage, distressed and restructuring situations as well as in value equities and real estate. Last year Farallon Capital Offshore rose by nearly 13 percent, net of the 1 percent management fee and 20 percent performance fee.
Steyer, who is also a partner at Hellman & Friedman, the San Francisco-based investment banking and private equity firm that sponsored Farallon's launch in 1986, has been playing the spreads in M&A since he ran the merger arbitrage department at Goldman, Sachs & Co. A summa cum laude graduate of Yale University, Steyer holds an MBA from Stanford Business School, where he was an Arjay Miller Scholar.
To the surprise of many, a Farallon-led group in March won the bidding for Bank Central Asia, the big Indonesian commercial bank, beating out British bank Standard Chartered. Farallon's $531 million offer was lower than Standard Chartered's bid.
Among other charities, Steyer supports the Yerba Buena Center for the Arts and the Grand Canyon Trust.
GLENN DUBIN & HENRY SWIECA
Highbridge Capital Management
Avoiding the limelight and public scrutiny, Glenn Dubin and his partner, Henry Swieca, have become one of the hedge fund world's most successful secrets since they launched their offshore fund, Highbridge Capital Corp., in September 1992. The $3.9 billion fund has scored double-digit returns in six of the past seven years; their 12 percent gain last year, net of their 2 percent management fee and 25 percent performance fee, marked their worst annual return since 1998.
The duo specializes in arbitrage trading strategies, especially those involving convertible securities, as well as junk bonds and distressed assets. They also look for inefficiencies in so-called event-driven situations. Their goal is to deliver consistent returns with low volatility.
Dubin, who received a BA in economics from the State University of New York at Stony Brook, began his Wall Street career in 1978 at E.F. Hutton & Co., where he met Swieca; the two joined Shearson Lehman Brothers in 1986. At Shearson, Dubin specialized in merger arbitrage and special situation investments for institutional and private investors.
Dubin serves on the board of directors of Max Re, a Bermuda-based reinsurance company whose investors include Louis Bacon's Moore Capital Management. He is a founding board member of the Robin Hood Foundation, alongside Tudor Investment Corp.'s Paul Tudor Jones II, and he sits on the board of directors of the Michael J. Fox Foundation for Parkinson's Research along with SAC Capital Advisors' Steven Cohen and Blue Ridge Capital's John Griffin.
Swieca, who serves as co-chairman of Dubin & Swieca and is a principal of Highbridge Capital Management, began his career at Merrill Lynch & Co. in 1979 before earning his MBA in investment management at Columbia Business School. Unlike his partner, Swieca has left virtually no public trace of his nonprofessional life. No charities, no boards of directors, no glitzy functions.
Standard Pacific Capital
The Internet era wasn't easy on Andrew Midler. In the first five years after he launched San Francisco,based Standard Pacific Capital in 1995, the long-short equity manager failed to break the 13 percent return barrier.
But the merits of his style of investing have become clearer since stock markets went into free fall in 2000. While many bottom-up, long-only stock pickers have suffered big losses during the past two years, Midler has kept a steady course, racking up a 22 percent gain in 2000 and a nearly 8 percent return in 2001.
Perhaps he is drawing on the lessons he learned at Fidelity Investments, where he worked from 1986 until 1993. During that period two of the three funds Midler ran ranked second and the other ranked first in their respective categories, according to Lipper. Subsequently, he managed global long-short equity money for Odyssey Partners' Leon Levy and Jack Nash.
The rather secretive Midler, who also did a short stint at Credit Suisse First Boston before launching Standard Pacific, is known to minimize macro-type investment picks. According to Standard Pacific's year-end Securities and Exchange Commission filing, the five largest positions of the $3.3 billion-in-assets firm were Ace, BJ's Wholesale Club, CVS Corp., Raytheon Co. and SBC Communications.
Cerberus Capital Management
Stephen Feinberg named his New York City-based firm for the three-headed dog that guards the entrance to Hades and two of his funds for the river that runs by it - Styx.
No surprise then that Feinberg specializes in the rough-and-tumble world of bankruptcies, restructurings and distressed investing. He's awfully good at pulling profits out of disaster.
Last year six of Feinberg's hedge funds - with a combined $3.7 billion in assets - returned between 11 and 14 percent. (Feinberg also runs $3.4 billion in private equity-style and distressed real estate funds.)
The 42-year-old Princeton University graduate got his start at Drexel Burnham Lambert, working on proprietary investments, before leaving in 1985 to manage money independently. Although he carefully guards his privacy, he is known to have been an East Coast-ranked high school tennis player who also has a fondness for chess and skiing.
LEE AINSLIE III
We should all have such poor years. After a stunning five-year run in which he averaged a 27.7 percent compounded return, Lee Ainslie III, 38, last year suffered his worst performance since joining Maverick Capital in 1993. But in recording his 5.2 percent gain in a year that saw the Standard & Poor's 500 index drop by 13 percent, the former Tiger Management Corp. managing director stuck to his investing style. He doesn't make big market-timing calls. He never puts more than 5 percent of his capital in one stock; generally, 4 percent is his limit. And he hedges each sector and region that he is long.
Maverick had about $7.9 billion invested in just 79 stocks at the end of the fourth quarter of 2001, according to mandated quarterly filings. Four of Ainslie's five biggest holdings were consumer stocks: Best Buy Co., Home Depot, PepsiCo. and Philip Morris Cos. The fifth was health care services provider HCA. Each of these stakes was worth about $250 million. At the end of the third quarter, Maverick had $8.3 billion spread over 107 issues. To be sure, 13-F filings don't include short sales and foreign holdings.
A 1986 engineering graduate of the University of Virginia, Ainslie received his MBA from the University of North Carolina at Chapel Hill. Before joining the investment world, he was a technology consultant for KPMG Peat Marwick. Ainslie joined Tiger in 1990.
Few financial instruments are labeled "radioactive" more often than mortgage-backed securities. How appropriate then that George Hall - a former Tenneco Corp. nuclear engineer - has managed to master them.
Hall, 41, began trading mortgage-backeds at Citicorp Investment Bank shortly after receiving his MBA from the University of Pennsylvania's Wharton School in 1986. He founded New York City-based Clinton Group in 1991 with backing from Itochu Corp., a Japanese trading company, then branched out to trade other fixed-income securities, such as convertibles and government bonds. Over the past three years, three of Hall's funds have delivered double-digit returns. Altogether he now runs $3.7 billion spread over six funds and separate accounts. The largest - Trinity Fund, which specializes in mortgage arbitrage and has $1.2 billion in assets - posted a 12.2 percent return in 2001. The $280 million Riverside Convertible fund rode last year's attractive convertible arbitrage conditions to a 20.2 percent return. Only the Clinton Arbitrage Fund, which deals primarily in global government bonds, recorded a single-digit return.
A graduate of the U.S. Merchant Marine Academy, Hall for years raced boats competitively in locales such as Virginia Beach and Ocean City, Maryland.
Och-Ziff Capital Management Group
Single-digit returns made many hedge fund managers heroes to their investors last year. Multiplied by billions of dollars of capital, they were also enough to give their authors, like Daniel Och, a very respectable year's pay.
In 2001 Och's $5 billion OZ Master Fund eked out a 6.4 percent return, net of its 1.5 percent management fee and 20 percent performance fee, from its global multistrategy. His $550 million OZ Europe fund did worse, climbing just 4.2 percent. Only the OZF Credit Opportunity Fund, a $500 million distressed credit and convertible bond operation, delivered a 1990s-style return - 18.5 percent. From inception in April 1994 through December 2000, the OZ Master Fund rose at a compounded annual rate of 22.2 percent.
Och, 41, who has a BS in finance from the University of Pennsylvania's Wharton School, joined Goldman, Sachs & Co. in 1982, where he was a risk arbitrageur and co-head of U.S. equity trading. He founded New York City,based Och-Ziff Capital Management Group in 1994 with funding from the three Ziff brothers, publishing heirs who have plowed much of their family's fortune into hedge fund investing.
Tudor Investment Corp.
Seniority has its rewards. Last year James Pallotta, head equities trader at Tudor Investment Corp., finished down nearly 3 percent running $1.9 billion in the firm's two Raptor Global Funds (no relation to the Enron Corp. partnerships of the same name) as well as the outfit's other equity money. Still, Pallotta managed to win a place among the top hedge fund earners of 2001.
How? With nine years under his belt at Tudor, Pallotta has a significant ownership position in the firm, which overall had a great year.
To be sure, Pallotta deserves a break. In 2000, when the Standard & Poor's 500 index was down more than 10 percent, Pallotta finished up 2 percent. The year before, his returns had soared by 91.6 percent, net of fees, while the S&P rose 19.5 percent. And he has generated 25 percent annualized returns during his nine-year Tudor tenure.
At the end of 2001, Tudor had more than $2.3 billion invested in 190 individual stocks. Its biggest holdings: specialty packaging and consumer products supplier Pactiv Corp.; healthcare-related companies Guidant Corp., Healthsouth Corp. and Schering-Plough Corp.; and Sallie Mae's holding company, USA Education, now known as SLM Corp.
Pallotta, 44, grew up in the Boston area and works out of a tony office in Beantown's Rowes Wharf neighborhood, far from Tudor's Greenwich, Connecticut, offices. He spent ten years with Boston-based Essex Investment Management Co. before joining Tudor in 1993.
Moore Capital Management
Talk about last-minute reprieves. For the second straight year, Louis Bacon found himself losing money as he headed into December. But once again the global macro maven managed to propel his portfolios well into the black by year-end. Moore Global Investments, his largest fund - at an estimated $3 billion to $4 billion, it's more than five times the size of Moore Capital's Remington Investment Strategies fund - finished the year up 10.1 percent, net of fees, which are believed to be 1 percent of total assets and 20 percent of performance. Moore Global Fixed Income Fund, which has more than $1 billion in assets, was said to be up about 13 percent last year. The three funds combine for $5 billion to $6 billion of his $8 billion under management.
The cautious and very private Bacon had been heavy on cash throughout the year, but he is said to have engineered his 11th-hour turnaround by going long bonds and shorting the yen and euro, both of which plunged for part of the month. That helped Bacon get out of the red, but the rebound didn't leave everyone satisfied. As one of his investors puts it, "He missed the boat on the bond market."
Bacon also steered mostly clear of last year's treacherous stock market. Just $246 mil-lion of his assets were in equities at year-end, according to government filings. Holdings included put options on Bank of New York Co., Level 3 Communications, Royal Caribbean Cruises, Wells Fargo & Co. and Xerox Corp. His biggest long position was in Merrill Lynch & Co.'s Biotech Holdrs, the exchange-traded mutual fund.
The 47-year-old Bacon, whose stepmother is the sister of famed Tiger Management Corp. guru Julian Robertson, also offers a number of smaller funds, including a fund-of-funds and a tech-oriented private equity group that has 28 investments in information technology companies.
In the end, Jeffrey Gendell proved to be right. But the late 1990s were not easy for this value-obsessed Wharton MBA, who honed his craft managing money for seven years under trading masters Leon Levy and Jack Nash at Odyssey Partners before setting up Tontine Partners, a value fund, in 1997. Not for him the overbearing bluster of the Internet-tech stock set. "Where are the revenues?" he asked. "What's the business plan? Where are the assets?" Detractors snickered, and his returns suffered, slipping by nearly 1 percent in 1998 and climbing by only single-digit percentages in 1999 and 2000.
But Gendell, 42, stuck to his knitting, buying value stocks - especially small, obscure thrifts that were selling below book. Though market pariahs, these institutions had book values that were growing by 10 to 15 percent per year, and they were using their excess cash flow to buy back stock before merging with others.
Last year Gendell's patience was rewarded. Tontine Partners shot up by nearly 20 percent, thanks to positions in small banks as well as in homebuilders and energy companies. And Tontine Financial Partners, a sector fund specializing in financial stocks, soared 42 percent, thanks to a miniflurry of merger activity among the small thrifts and banks. (In fact, last year more of his holdings were taken over than in any other year, despite a general decline in M&A.) Gendell, who runs $500 million, would have done even better if he hadn't covered his shorts on September 7.
Ahmet Okumus kept much of his powder dry last year. In plummeting markets, that strategy worked. Despite having on average 42 percent of his assets idling in cash, the president of Okumus Capital delivered returns of between 29 and 35 percent in his two tech-oriented funds and two long-short value funds, thanks to some shrewd value-stock picks. From May 2000 through year-end 2001, his funds were up more than 100 percent.
Half of Okumus's gains came from tech stocks, including the hard-hit telecom and semiconductor sectors. Generally, Okumus favors stocks trading at their ten-year lows as well as companies that are buying back their stock whose insiders hold shares purchased at higher prices. He steers clear of biotech companies, real estate investment trusts and utilities because he doesn't believe they reach the valuation levels he's comfortable with.
Okumus, 32, began his trading career in Istanbul running his family's money. After moving to the U.S. in 1989 to attend San Diego State, he dropped out in 1992 and began managing money full-time for family and friends. He launched his first hedge fund, the Okumus Opportunity Fund, in July 1997. Legendary investor Sir John Templeton is the $486 million firm's largest investor, with more than $100 million.
Tudor Investment Corp.
Dwight Anderson got off to a strong start after he set up his pair of Ospraie Funds - offshore and domestic versions - in February 2000. They climbed some 17 percent in their first 11 months and then followed with a gain of 20.2 percent in 2001.
Anderson specializes in trading commodities but also dabbles in the equities market - mostly commodities companies and basic industries - as well as in derivatives. Last year he made most of his money buying commodities as well as shares of foreign and domestic commodity producers. His favorites in the past have included Sappi, the South African paper giant, Australian mining companies WMC and BHP Billiton and Brazilian miner Companhia Vale do Rio Doce.
A Princeton University graduate who holds an MBA from the University of North Carolina at Chapel Hill, Anderson, 35, cut his teeth working for Julian Robertson at Tiger Management Corp. from 1994 to 1999 before becoming a senior portfolio manager at Tudor Investment Corp.
Intrepid Capital Management
Specializing in tech stocks is a tough way to make a living these days - unless you've been shorting them. Consider Steven Shapiro. He posted a better than 21 percent return last year in each of his three funds by finishing flat on his long positions and making lots of money on his shorts.
Shapiro has done well through the bull and the bear years in tech, posting gains of 58 percent and 72 percent in 1999 and 2000, respectively. In the past three years, he has not been down by more than 2 percent in a single month.
Shapiro, 41, fashions himself as a conservative investor who runs a highly diverse portfolio and takes a bottom-up approach. He can consider his long portfolio's flat finish for 2001 a moral victory, given the pasting that many of his peers suffered. But the payoff came from shorting software and semiconductors.
Shapiro's success with tech stocks should come as no surprise. He ran Fidelity Investments' Fidelity Select Electronics fund and then covered the sector for Tiger Management Corp. for four years. The tech-savvy manager gained considerable publicity when legendary investor George Soros gave him $25 million to invest after Shapiro launched Intrepid Capital Management in July 1998 with Mike Au, who subsequently left. Soros' investment was worth about $340 million at year-end.