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Wall Street

Happy Hedge Fund Managers Earn Money for Nothing

It might seem crazy what I’m ‘bout to say …

As the last billionaire exited the stage yesterday at the Ira W. Sohn Investment Research Conference, an elite gathering of hedge fund managers and their acolytes, the audience rose to the tune of Pharrell William’s hit track, Happy. And why wouldn’t they be? As a class, hedge fund managers badly underperformed the plain vanilla stock market in 2013—yet top earners were paid 50 percent more than in the prior year (when hedge funds also trailed the market).

Sunshine she’s here, you can take a break …

David Tepper of Appaloosa Management personally took home $3.5 billion in 2013, according to Institutional Investor’s Alpha, which today published its annual Rich List of the industry’s top 25 earners.

I’m a hot air balloon that could go to space …

With a 42 percent return, Tepper beat the Standard & Poor’s 500-stock index, as did Paulson & Co.’s John Paulson (a $2.3 billion haul). But many of the managers on the list did not—they amassed their stratospheric piles by charging clients steep fees, typically 2 percent of assets and 20 percent of gains, and investing their own money (i.e., previous years’ compensation) in their funds.

With the air, like I don’t care, baby, by the way …

“That last factor explains why some managers landed on the list even though their firms did not generate big investment returns,” IIA wrote.

Because I’m happy …

Steven Cohen of SAC Capital Advisors was No. 2 on the list, earning $2.4 billion. His hedge fund pled guilty to “reaping hundreds of millions of dollars in illegal profits and fostering a culture of criminality that encouraged brazen insider trading by its employees,” as Bloomberg summarized on April 10.

Clap along if you feel like a room without a roof …

Cohen will be ineligible for next year’s IIA list, because as part of his $1.8 billion settlement with the government, he can no longer manage outside money—only his own $11 billion fortune.

Because I’m happy …

Have hedge funds turned their underperformance around in 2014? No. They posted their worst first-quarter results since 2008, according to Preqin, a firm that tracks financial data.

Clap along if you feel like happiness is the truth …

Maybe next year, the Sohn people can cue up Dire Straits’ Money for Nothing.

Nick Summers covers Wall Street and finance for Bloomberg Businessweek. Twitter: @nicksummers.

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