Closely-followed hedge fund manager John Paulson spoke to a room of MBA grads and students on Tuesday evening about hedge fund compensation among other topics.
Paulson, who shot to fame after making billions betting against subprime during the housing crisis, was part of a panel at NYU Stern called the “Future of Finance” with Citigroup CEO Michael Corbat and Warburg Pincus Joe Landry. The Wall Street Journal’s Francesco Guerrera was the moderator.
Earlier on in the panel, Paulson discussed how the hedge fund industry has changed since he launched Paulson & Co., which now manages over $US20 billion of assets.
It’s a big number even by today’s hedge fund size standards. Compared to decades ago, however, it’s absolutely massive.
Paulson pointed out that in the early 90s, a large fund would have about $US100 to $US200 million. These days, the largest funds have billions in assets.
The larger AUM also contributes to a manager’s yearly take-home pay.
When Paulson discussed the massive paychecks some of the top fund managers take home you could see folks in the audience grin.
Fund managers are paid through a compensation structure commonly known as the “2 and 20,” which stands for a 2 per cent management fee and a 20 per cent performance fee charge. More specifically, “2 and 20″ means a hedge fund manager would charge investors 2 per cent of total assets under management and 20 per cent of any profits.
“So hedge funds have grown, the fee structure has stayed the same. The capital of the partners has become a more and more significant part of the earnings of the hedge fund managers. The total compensation to hedge fund managers has really grown enormously.”
Paulson pointed out that Institutional Investor’s Alpha magazine has a list featuring the estimates of the top 25 highest earning managers. He said that he lowest paid, No. 25, took home about $US300 million and the top five averaged excess of $US2 billion.
“After this little ah quick John Paulson maths, I am tempted to send my resumé,” panel moderator Guerrera joked.
Also, Paulson ranked No. 3 for the hedge fund managers’ “rich list.” His take home pay in 2013 was $US2.3 billion. He was just behind Steven Cohen and David Tepper.
Here’s the clip: