Hedge funds use methods like derivatives and short selling to hedge risk present in their investments in commodities, debt, and stocks. Investors must meet certain criteria to be eligible to participate in a hedge fund. Individuals who manage hedge funds receive a performance fee for their efforts. It is not an easy task and those who are good at what they do command a high salary.
The term “hedge fund manager” is used to refer either to the firm providing the service of investment management or the individual who directs the investment of the money supplied by the wealthy fund participants. A business engaging in investment management is involved in tasks like research, marketing, dealing, settling, internal auditing, and report preparation. The largest hedge fund management companies are complex and have many employees.
The best hedge fund managers are able to avoid or reduce their exposure to the main problems in running such a business. One of the most central is that company revenue is directly tied to market valuations. If asset prices fall, so do the revenues of the company, which is rarely a comfortable situation.
Clients are often not patient through these tough times. To make things worse, when funds are performing above average, it is often short-lived and seems to depend upon the fund manager’s skills. Some clients hesitate to place their money into an investment whose performance relies only on the ability of a few people. Sometimes, the best fund managers become wealthy enough to quit their jobs and manage their own investment portfolios.
David Tepper, who is the head of Appaloosa Management, George Soros, James Simons with Renaissance Technologies, John Paulson, and Steve Cohen with SAC Capital Advisors, were the top five best-paid managers of hedge funds in 2009, in order from numbers one through five. On this list, the highest paid earned $4 billion and the lowest earned $1.4 billion. The top 25 earners in 2009 earned $25.3 billion in total, equating to an average of more than $1 billion each. Even number 25 earned a respectible $350 million in 2009, far from a small chunk of pocket change.