Another bumper payday for hedge fund billionaires

Recession, what recession? <i>Absolute Return</i> magazine's annual survey of the best-paid hedge fund managers reveals the sector's stars continue to earn huge sums. Stephen Foley reports

1. David Tepper: $4.0bn

From a modest office in suburban New Jersey, a far cry from the bustle of Wall Street, David Tepper just made the biggest payday in hedge fund history.

His astonishing $4bn haul comes from one ballsy bet: that the US government wasn't going to let the country's biggest banks fail. One year ago, when the nationalisation of Citigroup and Bank of America was on the cards, and when it seemed as if these titans might not meet their obligations to creditors, Mr Tepper's Appaloosa Management snapped up bank debt. He's done the same at Royal Bank of Scotland in the UK, too. No doubt he rubbed the sculpture of a pair of testicles that he keeps in the office, as he is wont to do for luck and for laughs.

Goldman Sachs may be ruing repeatedly passing over Mr Tepper for promotion when he worked as a credit analyst there in the 1980s. He walked out in frustration, and has never looked back. Now 52, he still lives with his wife and three children in the two-storey home that he purchased in the early Nineties – a short hop from the office, so he can always be home for dinner.

2. George Soros: $3.3bn

The Hungarian-born hedge fund pioneer founded his Quantum Fund in 1970, and his longevity at the top end of the industry is almost as extraordinary as the raw number for his taking last year.

It is more than 17 years since his bet against the pound earned him $1bn (£650m) and the nickname "the man who broke the Bank of England", and when Institutional Investor's rich list was first calculated in 2001, it was Mr Soros who topped it with earnings of $700m that year.

He has kept atop the rankings, through good years and bad, through boom times and financial crises, thanks to the sheer size and diversity of his holdings. The Quantum Fund was up 29 per cent last year, earning Mr Soros $3.3bn in investment gains and fees.

But Mr Soros enjoyed 2009 for reasons other than the billions. Thanks to the financial crisis, he has won an eager audience for his philosophy of finance, which warns that markets are inherently unstable and prone to what he calls "reflexivity". They don't reflect economic reality, he says, they change it.

Armed with this insight, he has been vociferously arguing for a ban on speculative credit default swaps – which he describes as "selling insurance on someone's life to someone else and giving them a gun" – and betting there will be a bubble in gold.

3. Jim Simons: $2.5bn

Way to go out on a high note. Jim Simons retired from the day-to-day running of his spectacularly successful quantitative hedge fund business Renaissance Technologies on 1 January, but not before closing out another highly lucrative year. In fact, the firm's flagship Medallion Fund has had only one negative quarter in the past 15 years. How?

Mr Simons is the granddaddy of the so-called "black box" trading programmes. Renaissance computers harvest tiny profits from millions of automated transactions, designed to exploit market patterns divined in the historical data. Unsurprisingly, the publicity-shy New Yorker's pedigree is second to none – he is an MIT graduate whose first job out of college was as a mathematician working for the Defense Department cracking enemy codes during the Vietnam War.

Despite the big personal win, though, some of the lustre came off Renaissance in 2009. While employees have their money mainly tied up in Medallion, a newer fund with more outside investors performed less well.

The two men who have taken over the running of Renaissance – Bob Mercer and Peter Brown, who together developed voice-recognition technology for IBM in the Eighties – still have Mr Simons to call on as non-executive chairman.

4. John Paulson: $2.3bn

The man who made a fortune betting that the financial system was on the precipice of impossible housing debt has just made a second fortune betting that the same system would return to health.

A previously obscure Manhattan-based hedge fund manager, who had set up on his own in 1994 after working at investment banks including the now defunct Bear Stearns, John Paulson became the stuff of legend almost overnight in 2007.

By recognising the deteriorating quality of US sub-prime mortgages, he predicted the collapsing value of mountains of mortgage derivatives held across Wall Street, and the bet was immortalised in the book The Greatest Trade Ever. His $3.7bn (£2.4bn) personal pay-day that year was the biggest ever, until it was eclipsed by David Tepper in 2009.

His fund, Paulson & Co, went from managing $6bn at the start of 2007 to $28bn at the end, and the swollen coffers have made each successive successful bet that much more lucrative.

And by the middle of 2008, those bets were being placed on a recovery in bank fortunes, through investments in the financial sector. He has also been betting that inflation will become a persistent problem in coming years, which has led him to invest in gold.

5. Steve Cohen: $1.4bn

Steve Cohen's self-titled SAC Capital Advisors is one of the biggest, oldest and most controversial hedge funds in the US, and Mr Cohen himself is one of the industry's most talked-about fund managers.

His mansion, on a 14-acre estate in Greenwich, Connecticut, the hedge fund capital, is home to what is becoming one of the world's great art collections, including works by Willem de Kooning and Edvard Munch, and a Damian Hirst shark that began to decompose last year.

His fiercely guarded private life also hit the headlines last December in a bizarre spat with his ex-wife, whose lawsuit against him – later dropped – accused him of insider trading early in his career, a charge he firmly denied.

Where it counts – making money – SAC continued to prove its worth. The firm manages $12bn (£8bn) of Mr Cohen and other investors' money, and is known for its aggressive trading.

Its "quant" business, using complex algorithms to work out what to buy and sell, makes so many tiny transactions that the firm is said to account for as much as 3 per cent of all the trading on the New York Stock Exchange on some days.

6. Carl Icahn: $1.3bn

The septuagenarian activist investor was fighting on multiple fronts in 2009, continuing his efforts to shake up companies as diverse as Lions Gate, the film maker behind Precious, Biogen, a biotech company, and Trump Entertainment, the collapsed casino business founded by Donald Trump. The investments that really paid off, though, were in distressed debt, the bonds of companies that looked to be heading towards bankruptcy, which nobody wanted to touch at the start of last year. He's not confident of repeating the trick in 2010. "There are still great opportunities in bankrupt companies," he told The New York Times, "but dealing with bankruptcies is an arcane art."

7. Eddie Lampert: $1.3bn

Another of the Goldman Sachs alumni at the top of the Institutional Investor list, Eddie Lampert is perhaps closer to a private equity investor than to the traditional image of a fly-by-night hedge fund manager.

He buys big stakes in a few companies, and sits on them. His retailer, Sears, which he created by bolting together a number of famous US chains, has surged in value in the past year. It is the same story with the rest of the 47-year-old's portfolio, thanks to the restoration to health of the US economy and the surge in the stock market.

8. Ken Griffin: $900m

"Regretfully, I did not foresee the financial disaster that was to unfold," the founder of the Citadel hedge fund says of the credit crisis that left the fund fighting for its very survival in 2008.

What a difference a year makes, though. With the rebound by the credit markets, and the increase in value of holdings in the financial sector, such as E-Trade, the online broker, the pugnacious Harvard graduate is back in the game. Mr Griffin started trading options from his university dorm, and is one of the most outspoken of the industry's many cheerleaders for deregulated financial markets.

9. John Arnold: $900m

One of America's youngest billionaires, John Arnold made his fortune in 2006 when the collapse of another hedge fund, Amaranth Partners, roiled the energy markets. Amaranth had bet the firm that natural gas prices were going to rise, and Mr Arnold's Centaurus Energy had bet the opposite. Amaranth lost $6bn in a week; Mr Arnold's fund ended the year with a 317 per cent profit on its estimated $1bn of assets. Based in Houston, Texas, Mr Arnold, now 36, set up Centaurus after the collapse of Enron, where he had been one of its star energy traders.

10. Philip Falcone: $825m

Philip Falcone recounts with pride his journey from humble beginnings to hedge fund riches. He was one of nine children living in a three-bedroom home in Minnesota, his father a utility superintendent and his mother working in a local shirt factory. "Not everyone who runs a hedge fund was born on Fifth Avenue," he once told Congress. Now Forbes magazine ranks this former professional hockey player-turned-junk bond trader among the 500 richest people in the world, with a fortune of $2bn after a 47 per cent gain in the main funds at his Harbinger Capital last year.