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Hedge Fund Moguls’ Pay Has the 1% Looking Up
By ALEXANDRA STEVENSON
Hedge fund managers heavily populate the so-called 1 percent in the United States. And they are getting richer.
The 25 highest-earning hedge fund managers in the United States took home a total of $21.15 billion in compensation in 2013, according to an annual ranking published on Tuesday by Institutional Investor’s Alpha magazine.
They earned that hefty sum in a year when most hedge fund managers fell short of the market’s returns. The multibillion-dollar payday is the highest since 2010, and it is 50 percent more than in 2012, according to the survey.
David A. Tepper, the 56-year-old founder of Appaloosa Management, maintained his spot atop the list, bringing in $3.5 billion last year, after earning $2.2 billion in 2012. Steven A. Cohen of SAC Capital Advisors ranked No. 2 after pocketing $2.4 billion, while John A. Paulson of Paulson & Company took home $2.3 billion, ranking No. 3.
The size of these paychecks are estimates based on the value of the managers’ stakes in their hedge funds and the fees they charge. Investors typically pay management fees of 2 percent of the total assets under management and 20 percent of the profits, or “2 and 20.”
Mr. Tepper returned 42 percent to investors in his flagship Appaloosa Investment I and Palomino funds, partly driven by big bets on formerly down-and-out airline stocks like Delta Air Linesand American Airlines, as well as financial and auto stocks.
While the fees they pay can vary, investors in Appaloosa typically follow the “2 and 20” pattern. A representative for Mr. Tepper declined to comment.
Mr. Paulson, who made his name betting against the housing market, generated returns of 63 percent in his Paulson Recovery fund after betting on the housing recovery and on unloved financial services stocks. His merger fund also made strong gains from smart wagers on deals in the telecommunications, biotechnology and health care sectors.
Paulson & Company takes a 1.5 percent management fee and 20 percent performance fee. A spokeswoman for Mr. Paulson declined to comment.
Mr. Cohen returned 20.1 percent to investors in his multibillion-dollar SAC Capital Advisors, and his paycheck was lifted by the 50 percent fee he charged them. He has been near the top of the rankings for all but one year of Institutional Investor’s survey, which has been compiled since 2002.
But it will most likely be Mr. Cohen’s last time on the list, which tracks managers who invest outside money. As part of an agreement with the government last year to plead guilty to securities fraud violations and pay a record $1.2 billion penalty, SAC agreed to close its doors to outside investors and manage only Mr. Cohen’s personal wealth. The firm has since changed its name to Point72 Asset Management.
A spokesman for Mr. Cohen declined to comment.
More remarkable than the size of the paychecks in 2013 were the multiples by which they have ballooned since Institutional Investor began collecting data on pay. During that period, the $2.7 trillion hedge fund industry has sought billions of dollars from the rich and from pension funds and endowments.
George Soros, the investor whose $1 billion bet against the British pound is said to have broken the Bank of England in 1992, was the biggest earner in the survey’s inaugural year, with $700 million in earnings, one-fifth of Mr. Tepper’s paycheck in 2013.
Daring bets that bring investors huge gains have helped justify the high terms, but lackluster returns in recent years have drawn criticism from many in the investing community.
For most hedge fund clients, 2013 was disappointing. It was the fifth consecutive year that hedge funds fell short of stock market performance, with the average fund returning 9.1 percent, according to a composite index of 2,200 portfolios collected by HFR, a firm that tracks the industry.
By comparison, the Standard & Poor’s 500-stock index soared 32.4 percent after accounting for dividends.
Some hedge fund titans took home large sums of money even as their investors were left with little to show, in large part because of the sheer size of the assets under management and the fees they charge.
LEAKED: Docs obtained by Pando show how a Wall Street giant is guaranteed huge fees from taxpayers on risky pension investments
BY DAVID SIROTA
ON MAY 5, 2014
When you think of the term “public pension fund,” you probably imagine hyper-cautious investment strategies kept in check by no-nonsense fiduciary laws.
But you probably shouldn’t.
An increasing number of those pension funds are being stealthily diverted into high-fee, high-risk “alternative investments” that deliver spectacular rewards for the Wall Street firms paid to manage them – but not such great returns for pensioners and taxpayers.
And yet… despite the fact that they deal with the expenditure of taxpayer money, the agreements between public pension systems and alternative investment firms are almost entirely secret.
Until now.
Thanks to confidential documents exclusively obtained by Pando, we can now see some of the language and fee structures in the agreements between the “alternative investment” industry and major public pension funds. Taken together, the documents raise serious questions about whether the government employees, trustees and politicians overseeing major public pension funds are shirking their fiduciary responsibilities under the law when they are cementing “alternative” investment deals.
The documents, which were involved in a recent SEC inquiry into the $14.5 billion Kentucky Retirement Systems (KRS), were handed to us by SEC whistleblower Chris Tobe, an investment consultant and former trustee of the KRS. Tobe has also written a book — “Kentucky Fried Pensions” — about the scandalous state of the Kentucky public pensions system.
The documents provided by Tobe (embedded below) specifically detail Kentucky’s dealings with Blackstone – a giant Wall Street investment firm which has deployed a platoon of registered lobbyists in Kentucky and whose employees are major financial backers of Kentucky U.S. Sen. Mitch McConnell (R).
The Blackstone-related documents, though, don’t just tell a story about public pensions in Kentucky. The firm, which just reported record earnings, does business with states and localities across the country. The Wall Street Journal reports that “about $37 of every $100 of Blackstone’s $111 billion investment pool comes from state and local pension plans.”
In other documents, public pension money is exempted from some of the most basic protections usually guaranteed under federal law. Other contract language appears to license Blackstone to engage in financial conflicts of interests that could harm investors.
Despite the documents involving government agencies, and taxpayer money, they are all marked confidential. The public is not allowed to see them.
One of those documents given to Pando by Tobe is a confidential memo to KRS investment committee members from August 2011. In the memo, KRS staff outlines their desire to invest roughly $400 million in Blackstone’s Alternative Asset Management Fund (BAAM), which is a so-called “fund of hedge funds.”
As documented on page seven of that memo, Blackstone was guaranteed whopping fees of 50 basis points plus 10 percent of any overall profits on retirees’ money. In addition, the memo estimates 1.62 percent management fees and 19.78% incentive fees to be paid on top of the Blackstone fees to the underlying (and undisclosed) individual hedge fund managers in the “fund of funds.”
In 2013, according to KRS data, BAAM earned an 11.54 percent return for the pension system. That was 20 percent below the S&P 500 that year, meaning, Tobe says, that Kentucky taxpayers would have earned $78 million more in an almost fee-less S&P index fund. Those figures are consistent with a recent study from the Maryland Public Policy Institute showing “that state pension systems that pay the most for Wall Street money management get some of the worst investment returns.”
Fees, says Tobe, are a driver of the underperformance. Using the secret memo’s figures, Tobe estimates that 33 percent of that stunning one-year underperformance - or about $25 million – was in the form of fees paid to Blackstone and the other managers in its “fund of funds.”
According to data from the investment research firm Prequin, 20 others public pension funds are also invested in BAAM. Assuming those funds invested in BAAM under roughly the same terms as Kentucky, Tobe estimates that Blackstone and underlying managers in BAAM raked in well over $200 million in fees in 2013 on just that one fund of funds.
Absent from the memo to the trustees are any details about which particular hedge funds are in the BAAM fund. In an interview with Pando, Tobe argues that was by design because, he says, Kentucky officials wanted trustees to vote on the investment without being able to do due diligence. Tobe says that meant trustees were not made aware that BAAM invested in SAC Capital – the firm whose executives recently pled guilty to insider trading charges, and who at the time of the Kentucky investment were already under SEC investigation.
Amazingly, while asking public pension trustees to invest money in the fund, the Blackstone document also says that “none of the Partnership’s investments have been identified,” meaning trustees could not even evaluate the underlying investments before they decided to invest retirees’ nest eggs.
In terms of legal protections, the document says investments made by the private equity fund could be illiquid “for a number of years.” In a section marked “absence of regulatory oversight,” the document also says investors “are not afforded the protections of the 1940 (Investment Advisers) Act.” It also says that in the event of litigation brought against the managers of the fund, those costs “would be payable from the assets” of the investors.
Another section declares that “Blackstone may have conflicting loyalties” between the different funds it operates, and that “actions may be taken for the Other Blackstone Funds that are adverse” to investors.
These people have zero shame.
According to former SEC investigator Ted Siedle, who served as counsel to Tobe during the SEC investigation, the conflict-of-interest section marked “Fees for Services” is particularly problematic. He says it permits private equity managers to assess fees on companies the private equity fund owns, but then not compensate the fund investors (like public pensions) for those fees. This stealth fee-inflating practice, which is attracting SEC scrutiny, has been called the “crack cocaine of the private equity industry.”
In recent months, questions have been raised about why pension funds are investing so heavily in high-fee, high-risk alternative investments. For example, a New York Times report recently noted that “a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better” than those investing heavily in alternatives. Similarly, Bloomberg News reported that “more than half of about 400 private-equity firms that SEC staff have examined have charged unjustified fees and expenses without notifying investors” of such fees.
When Pando asked for specific comment on whether agreements between Wall Street firms and taxpayer-backed public pensions should be available to the public, Rose said: “We are going to decline to comment on this.” Likewise, the Private Equity Growth Capital Council and KRS did not respond to questions about secrecy.
That response – or lack thereof – highlights how public pension transactions with Wall Street remain shrouded in secrecy in states throughout the country. As Susan Webber has written, despite the astronomical sums of taxpayer money and retirement income at stake, “public pension funds routinely turn down requests” for such basic information in hopes of shielding the fee bonanza from scrutiny.
For example, following SEC warnings of fee abuse in private equity investments, the New York state’s Teachers’ Retirement System flatly rejected Reuters’ open-records request for information about its private equity holdings.
In Rhode Island, the financial industry is a major donor to the election campaigns of State Treasurer Gina Raimondo (D), who has used her power to move more pension money into high-fee alternative investments. Many of those investments subsequently underperformed and hurt pension earnings, all while generating big Wall Street fees. When transparency and good-government groups asked for the full details of the alternative investments in question, Raimondo refused.
By ALEXANDRA STEVENSON
Hedge fund managers heavily populate the so-called 1 percent in the United States. And they are getting richer.
The 25 highest-earning hedge fund managers in the United States took home a total of $21.15 billion in compensation in 2013, according to an annual ranking published on Tuesday by Institutional Investor’s Alpha magazine.
They earned that hefty sum in a year when most hedge fund managers fell short of the market’s returns. The multibillion-dollar payday is the highest since 2010, and it is 50 percent more than in 2012, according to the survey.
David A. Tepper, the 56-year-old founder of Appaloosa Management, maintained his spot atop the list, bringing in $3.5 billion last year, after earning $2.2 billion in 2012. Steven A. Cohen of SAC Capital Advisors ranked No. 2 after pocketing $2.4 billion, while John A. Paulson of Paulson & Company took home $2.3 billion, ranking No. 3.
The size of these paychecks are estimates based on the value of the managers’ stakes in their hedge funds and the fees they charge. Investors typically pay management fees of 2 percent of the total assets under management and 20 percent of the profits, or “2 and 20.”
Mr. Tepper returned 42 percent to investors in his flagship Appaloosa Investment I and Palomino funds, partly driven by big bets on formerly down-and-out airline stocks like Delta Air Linesand American Airlines, as well as financial and auto stocks.
While the fees they pay can vary, investors in Appaloosa typically follow the “2 and 20” pattern. A representative for Mr. Tepper declined to comment.
Mr. Paulson, who made his name betting against the housing market, generated returns of 63 percent in his Paulson Recovery fund after betting on the housing recovery and on unloved financial services stocks. His merger fund also made strong gains from smart wagers on deals in the telecommunications, biotechnology and health care sectors.
Paulson & Company takes a 1.5 percent management fee and 20 percent performance fee. A spokeswoman for Mr. Paulson declined to comment.
Mr. Cohen returned 20.1 percent to investors in his multibillion-dollar SAC Capital Advisors, and his paycheck was lifted by the 50 percent fee he charged them. He has been near the top of the rankings for all but one year of Institutional Investor’s survey, which has been compiled since 2002.
But it will most likely be Mr. Cohen’s last time on the list, which tracks managers who invest outside money. As part of an agreement with the government last year to plead guilty to securities fraud violations and pay a record $1.2 billion penalty, SAC agreed to close its doors to outside investors and manage only Mr. Cohen’s personal wealth. The firm has since changed its name to Point72 Asset Management.
A spokesman for Mr. Cohen declined to comment.
More remarkable than the size of the paychecks in 2013 were the multiples by which they have ballooned since Institutional Investor began collecting data on pay. During that period, the $2.7 trillion hedge fund industry has sought billions of dollars from the rich and from pension funds and endowments.
George Soros, the investor whose $1 billion bet against the British pound is said to have broken the Bank of England in 1992, was the biggest earner in the survey’s inaugural year, with $700 million in earnings, one-fifth of Mr. Tepper’s paycheck in 2013.
Daring bets that bring investors huge gains have helped justify the high terms, but lackluster returns in recent years have drawn criticism from many in the investing community.
For most hedge fund clients, 2013 was disappointing. It was the fifth consecutive year that hedge funds fell short of stock market performance, with the average fund returning 9.1 percent, according to a composite index of 2,200 portfolios collected by HFR, a firm that tracks the industry.
By comparison, the Standard & Poor’s 500-stock index soared 32.4 percent after accounting for dividends.
Some hedge fund titans took home large sums of money even as their investors were left with little to show, in large part because of the sheer size of the assets under management and the fees they charge.
LEAKED: Docs obtained by Pando show how a Wall Street giant is guaranteed huge fees from taxpayers on risky pension investments
BY DAVID SIROTA ON MAY 5, 2014
When you think of the term “public pension fund,” you probably imagine hyper-cautious investment strategies kept in check by no-nonsense fiduciary laws.
But you probably shouldn’t.
An increasing number of those pension funds are being stealthily diverted into high-fee, high-risk “alternative investments” that deliver spectacular rewards for the Wall Street firms paid to manage them – but not such great returns for pensioners and taxpayers.
And yet… despite the fact that they deal with the expenditure of taxpayer money, the agreements between public pension systems and alternative investment firms are almost entirely secret.
Until now.
Thanks to confidential documents exclusively obtained by Pando, we can now see some of the language and fee structures in the agreements between the “alternative investment” industry and major public pension funds. Taken together, the documents raise serious questions about whether the government employees, trustees and politicians overseeing major public pension funds are shirking their fiduciary responsibilities under the law when they are cementing “alternative” investment deals.
The documents, which were involved in a recent SEC inquiry into the $14.5 billion Kentucky Retirement Systems (KRS), were handed to us by SEC whistleblower Chris Tobe, an investment consultant and former trustee of the KRS. Tobe has also written a book — “Kentucky Fried Pensions” — about the scandalous state of the Kentucky public pensions system.
The documents provided by Tobe (embedded below) specifically detail Kentucky’s dealings with Blackstone – a giant Wall Street investment firm which has deployed a platoon of registered lobbyists in Kentucky and whose employees are major financial backers of Kentucky U.S. Sen. Mitch McConnell (R).
The Blackstone-related documents, though, don’t just tell a story about public pensions in Kentucky. The firm, which just reported record earnings, does business with states and localities across the country. The Wall Street Journal reports that “about $37 of every $100 of Blackstone’s $111 billion investment pool comes from state and local pension plans.”
In other documents, public pension money is exempted from some of the most basic protections usually guaranteed under federal law. Other contract language appears to license Blackstone to engage in financial conflicts of interests that could harm investors.
Despite the documents involving government agencies, and taxpayer money, they are all marked confidential. The public is not allowed to see them.
One of those documents given to Pando by Tobe is a confidential memo to KRS investment committee members from August 2011. In the memo, KRS staff outlines their desire to invest roughly $400 million in Blackstone’s Alternative Asset Management Fund (BAAM), which is a so-called “fund of hedge funds.”
As documented on page seven of that memo, Blackstone was guaranteed whopping fees of 50 basis points plus 10 percent of any overall profits on retirees’ money. In addition, the memo estimates 1.62 percent management fees and 19.78% incentive fees to be paid on top of the Blackstone fees to the underlying (and undisclosed) individual hedge fund managers in the “fund of funds.”
In 2013, according to KRS data, BAAM earned an 11.54 percent return for the pension system. That was 20 percent below the S&P 500 that year, meaning, Tobe says, that Kentucky taxpayers would have earned $78 million more in an almost fee-less S&P index fund. Those figures are consistent with a recent study from the Maryland Public Policy Institute showing “that state pension systems that pay the most for Wall Street money management get some of the worst investment returns.”
Fees, says Tobe, are a driver of the underperformance. Using the secret memo’s figures, Tobe estimates that 33 percent of that stunning one-year underperformance - or about $25 million – was in the form of fees paid to Blackstone and the other managers in its “fund of funds.”
According to data from the investment research firm Prequin, 20 others public pension funds are also invested in BAAM. Assuming those funds invested in BAAM under roughly the same terms as Kentucky, Tobe estimates that Blackstone and underlying managers in BAAM raked in well over $200 million in fees in 2013 on just that one fund of funds.
Absent from the memo to the trustees are any details about which particular hedge funds are in the BAAM fund. In an interview with Pando, Tobe argues that was by design because, he says, Kentucky officials wanted trustees to vote on the investment without being able to do due diligence. Tobe says that meant trustees were not made aware that BAAM invested in SAC Capital – the firm whose executives recently pled guilty to insider trading charges, and who at the time of the Kentucky investment were already under SEC investigation.
Amazingly, while asking public pension trustees to invest money in the fund, the Blackstone document also says that “none of the Partnership’s investments have been identified,” meaning trustees could not even evaluate the underlying investments before they decided to invest retirees’ nest eggs.
In terms of legal protections, the document says investments made by the private equity fund could be illiquid “for a number of years.” In a section marked “absence of regulatory oversight,” the document also says investors “are not afforded the protections of the 1940 (Investment Advisers) Act.” It also says that in the event of litigation brought against the managers of the fund, those costs “would be payable from the assets” of the investors.
Another section declares that “Blackstone may have conflicting loyalties” between the different funds it operates, and that “actions may be taken for the Other Blackstone Funds that are adverse” to investors.
These people have zero shame.
According to former SEC investigator Ted Siedle, who served as counsel to Tobe during the SEC investigation, the conflict-of-interest section marked “Fees for Services” is particularly problematic. He says it permits private equity managers to assess fees on companies the private equity fund owns, but then not compensate the fund investors (like public pensions) for those fees. This stealth fee-inflating practice, which is attracting SEC scrutiny, has been called the “crack cocaine of the private equity industry.”
In recent months, questions have been raised about why pension funds are investing so heavily in high-fee, high-risk alternative investments. For example, a New York Times report recently noted that “a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better” than those investing heavily in alternatives. Similarly, Bloomberg News reported that “more than half of about 400 private-equity firms that SEC staff have examined have charged unjustified fees and expenses without notifying investors” of such fees.
When Pando asked for specific comment on whether agreements between Wall Street firms and taxpayer-backed public pensions should be available to the public, Rose said: “We are going to decline to comment on this.” Likewise, the Private Equity Growth Capital Council and KRS did not respond to questions about secrecy.
That response – or lack thereof – highlights how public pension transactions with Wall Street remain shrouded in secrecy in states throughout the country. As Susan Webber has written, despite the astronomical sums of taxpayer money and retirement income at stake, “public pension funds routinely turn down requests” for such basic information in hopes of shielding the fee bonanza from scrutiny.
For example, following SEC warnings of fee abuse in private equity investments, the New York state’s Teachers’ Retirement System flatly rejected Reuters’ open-records request for information about its private equity holdings.
In Rhode Island, the financial industry is a major donor to the election campaigns of State Treasurer Gina Raimondo (D), who has used her power to move more pension money into high-fee alternative investments. Many of those investments subsequently underperformed and hurt pension earnings, all while generating big Wall Street fees. When transparency and good-government groups asked for the full details of the alternative investments in question, Raimondo refused.
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