The top 25 hedge fund managers earned an eye-popping $11.6 billion in compensation in 2014. However, that was only about half as much as they earned the prior year and roughly in line with their pay at the height of the financial crisis in 2008, according to an annual ranking released Tuesday by Institutional Investor's Alpha magazine.
To make matters "worse," the trade publication notes that at least 12 of these 1 percenters' funds posted gains that were eclipsed by the S&P 500 (SPX), which tallied a 13.7 percent return in 2014. As The New York Times noted, this was the sixth consecutive year that hedge funds have underperformed the broader market.
While many mutual fund mangers and pension funds follow the broad market index, it's not as important in the hedge fund industry, according to the Alternative Investment Management Association (AIMA). Hedge funds are marketed to sophisticated high-net worth individuals and institutional investors, and they're subject to less regulation than other types of investments.
"Prior to 1990, the hedge fund industry was very largely based in the U.S. and long/short U.S. equity was one of the most common strategies," the trade group noted. "But the hedge fund sector today is now more diverse -- AIMA has members in over 50 countries -- and more global -- investors in hedge funds have a choice of at least 20 different investment strategies, many of them designed to be uncorrelated to equity markets. Indeed only a relatively small number of individual funds -- perhaps fewer than 20 of the roughly 374 hedge funds managing over $1 billion -- are understood to be invested in US equities alone."
Hedge funds have plenty of luster for some investors. Citadel founder and CEO Kenneth Griffin, who topped the Alpha ranking with $1.3 billion in fees and gains on his own capital, delivered gains of 18.3 percent on his multi-strategy Kensington and Wellington funds. (Former Fed Chairman Ben Bernanke signed on as an adviser to Citadel in April.) Griffin has been on the Alpha list 13 times.
Activist investor William Ackman also made the Alpha ranking. His Pershing Square Capital saw gains of between 36 percent and 40.4 percent in its funds, according to Alpha.
Data from Hedge Fund Research shows that global hedge fund assets increased to $2.94 trillion in the first quarter of 2015, an increase of $95 billion. Investors poured $18.2 billion in net new capital to hedge funds in the first quarter. The HFRI Fund Weighted Composite Index, a proxy for the industry, rose 2.3 percent in the first quarter, the best quarterly gain in five quarters and largest outperformance of U.S. equities since the third quarter of 2011.
"There are an estimated 15,000 hedge funds," Don Steinbrugge, the CEO of Agecroft Partners, a hedge fund research and consulting company, told CBS MoneyWatch. "Probably 80 percent of them are not adding value."
Hedge funds will continue to attract investors worried that fixed-income funds will become pricey in a rising interest rate environment, he said.
Although the seven-figure earnings of some managers earn the headlines, Steinbrugge noted that plenty of their top execs don't earn such outsize compensation. He advises clients to focus on small to midsize funds whose leaders are eager to boost their performance to gain more investors.
"The comp level that hedge fund managers receive is highly correlated to how big the hedge fund is," Steinbrugge said. "The big hedge fund manager are going to make the most money."
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