John Paulson is living proof that investment really is a zero-sum game. While most of Wall Street has disclosed catastrophic losses following the sub-prime credit crisis, Mr Paulson personally banked at least $3bn last year by betting on the collapse, it was disclosed yesterday.
His earnings at the New York-based hedge fund Paulson & Co took him to the top of the fund-manager income league for 2007, according to the industry magazine Trader Monthly, which reckons that he earned twice as much as the runner-up on the list.
Mr Paulson, 52, made his money by short-selling at the risky end of the market for collateralised debt obligations (CDOs), the mortgage-backed securities packaged up and traded so disastrously by leading Wall Street investment firms. Thanks to the dramatic collapse in the value of CDOs, one of Mr Paulson's funds, Credit Opportunities II, soared in value from $130m to $3.2bn during the course of 2007.
Mr Paulson's former employers include Bear Stearns, the Wall Street bank that had to be rescued last month after its sub-prime losses; he left the firm in 1994 to launch his own hedge fund. Mr Paulson is no relation to the US Treasury Secretary Hank Paulson, one of the masterminds of the Bear Stearns bailout, but does have friends in high places, having recruited the former Federal Reserve chairman Alan Greenspan as an adviser this year. Ironically, Mr Greenspan's policies at the Fed are blamed by many for having sowed the seeds of the credit crisis.
Phil Falcone, who runs Harbinger Capital Partners, and was rated the second-highest earning fund man-ager of 2007 by Trader Monthly, also bet on the likelihood of a US housing crisis last year – as well as earning spectacular profits from the commodities boom. Like other hedge fund groups, Harbinger earns huge returns when it profits, charging clients 20 per cent of the gains it nets them, as well as a more modest 1.5 per cent annual management fee.
Four of the 10 highest-earning fund managers last year are based in London, with Christopher Hohn, chief executive of The Children's Investment Fund (TCI), taking sixth place with an income estimated at between $800m and $900m. Mr Hohn's scalps last year included the Dutch investment bank ABN Amro, which was sold to Royal Bank of Scotland after a protracted takeover battle prompted by TCI's calls for its break-up.
Trader Monthly's list of top-earning fund managers reveals the extent to which a handful of hedge funds have continued to earn huge sums despite the headline losses on Wall Street and elsewhere. The vast majority of the top 100 managers work in the hedge fund sector. In total, they earned $30.3bn during 2007, 25 per cent more than the 100 highest-paid managers of 2006.
Mr Paulson's 10-figure pay day, however, far outstripped his closest rivals, and was twice the amount awarded to the energy trader John Arnold, Trader Monthly's number one earner of 2006.Reuse content