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Problems paying the mortgage, filling the gas tank and feeding the family have eroded living standards for millions of Americans during the past several months. Not so for people who manage big piles of money; many of them made a fortune betting correctly on the housing debacle and rising commodity prices last year.
Our second annual look at the pay of folks who run hedge and private equity funds shows that the top 20 took home a collective $18.7 billion last year, 43 per cent more than in 2006. To even make the list you needed minimum earnings of $350 million, which is $90 million higher than the year before. No chief executive of a traditional Wall Street investment bank came even close.
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Our top-ranked earner, hedge fund manager John Paulson ($3.3 billion), reaped much of his bounty from shorting the ABX Index, which tracks the strength of the subprime mortgage market. Paulson earned an estimated $2.3 billion from his share of fees charged to investors and $1 billion from the appreciation of his own capital invested in Paulson & Co. funds.
Fund manager Philip Falcone, who ranked third with $1.7 billion, posted triple-digit returns by shorting subprime credit, resulting in $11 billion in growth for his two Harbinger Capital funds, excluding assets raised from new investors. John Burbank, who runs San Francisco hedge fund Passport Capital, made $370 million last year, also in large part by shorting home mortgage companies and mortgage-related debt.
Some members of our list, like Texans T Boone Pickens ($1.2 billion) and John Arnold ($700 million) made their fortunes the old-fashioned way: betting on energy. Pickens' $2.7 billion BP Capital Equity Fund grew by 24 per cent after fees, while his $590 million Commodity fund grew 40 per cent thanks to large positions in Suncor Energy, ExxonMobil, and Occidental Petroleum.
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For hedge fund billionaires Pickens and second-ranked George Soros ($2.4 billion), whose own investments compose a significant portion of their funds, there's more to be made from asset appreciation than from fees. Soros made $2 billion from the growth of personal investments within his $17 billion Quantum Endowment Fund, which returned 32 per cent for the year.
Cheap debt fueled growth for hedge and private equity funds in 2007, despite the late-year market slowdown. Hedge funds increased their assets by 14 per cent to $2.2 trillion, while private equity funds raised a record $300 billion for $2 trillion in assets.
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Each hedge fund manager on our list returned more than the 10 per cent industry average to their investors in 2007, including two based in London. Christopher Hohn and Alan Howard each earned an estimated $400 million by investing heavily in European companies and limiting exposure to the turbulent US markets.
To determine Wall Street's 20 Highest Earners of 2007, we examined hedge, private equity and mutual fund principals and traders, as well as investment bankers. The hedge fund and leveraged buyout bosses typically reap fees equal to 20 per cent of profits and 2 per cent of assets. Our paychecks are pretax and net of the firm's expenses, and exclude proceeds from selling shares in their own business.
For example, we count the $400 million that Stephen Schwarzman of Blackstone Group earned from annual salary, distributions of percentage fees and capital appreciation on his investments in Blackstone's funds, but exclude the $4.8 billion that he took out of the business when it went public.