Mutual funds : Billion-dollar club

NEW YORK – Top hedge fund managers are whizzes with numbers – a talent that will come in handy when they compute their annual compensation.

A handful of these managers have joined the billion dollar club – they had paychecks of more than $1 billion each in 2006 alone. And after a strong year on Wall Street that brought record bonuses and amid heightened interest in executive compensation, some hedge fund managers have drawn a measure of notoriety for their above-average salaries.

“It’s way more than the we’ve seen in the past. In terms of the dollar amount, the managers are making far more,” said Daniel Farkas, a hedge fund analyst at investment research provider Morningstar Inc.

“Part of it comes from the fact that the funds had good years last year,” he said.

What is to almost everyone an astonishing amount of money might not come as a surprise to those who have tracked the outsize returns of some hedge funds, which are essentially loosely regulated pools of capital.

Hedge fund investors, who tend to be wealthy individuals or institutions such as pension funds, often turn to these funds as part of a larger investing strategy because the funds use financial instruments such as derivatives to make their money.

Hedge fund managers typically draw their salaries from two sources: a cut of the fund’s overall assets and a slice of returns. Though the percentages vary, often managers get 2 percent of overall assets and 20 percent of returns.

Some observers view the pay matter-of-factly, saying it simply reflects what the market will bear.

Take James Simons, a one-time math professor-turned-hedge-fund manager, who last year earned an estimated $1.5 billion to $2 billion, according to Trader Monthly. Simons’ firm, Renaissance Technologies, controls the Medallion fund, which showed a return of 40 percent last year, the publication said.

By comparison, the Standard & Poor’s 500 index showed a 15.8 percent return.

“The reason that people make as much as they do is because they’re making so much for the institutions that they’re working for,” said Randy Shain, vice president at First Advantage Investigative Services, which creates reports for hedge funds and other investors on the backgrounds of hedge fund managers.

He contends the results of these managers justify the pay.

“It’s not as if someone’s losing because someone else is winning,” Shain said.

“I would argue that what they make is not obscene at all. … These people wouldn’t be making all of this money if you didn’t have pension funds and funds of funds that were giving them all this money,” he said.

“Some of these people are starting to approach the Bill Gates territory,” said Shain.