Hedge fund managers earned billions in 2008, but investors lost

It might have been a down year for most of us, with even hedge fund investors licking their wounds from big losses, but top the 25 hedge fund managers still walked away with billions. Institutional Investor's Alpha magazine, which comes out today, reports that the top 25 hedge fund managers earned a total of $11.6 billion in 2008. But, even their gains were cut in half -- down from $22.5 billion for the top 25 in 2007.

The top earner was James Simons, the former math professor whose earned billions for the hedge fund Renaissance Technologies, with total earnings of $2.5 billion in 2008. John Paulson, whose gains came from betting against the housing market, was in second place with gains of $2 billion, but that's down from $3.7 billion the year before. George Soros gained $1.1 billion. Some people dispute the Alpha numbers because they include estimates of the increase in the value of personal investments by the hedge fund managers, but none of the complainers offered an alternative ranking.

These earnings do not reflect what hedge fund investors earned in 2008. On average hedge funds lost 18 percent and investors withdrew money en masse. In fact, Morningstar reports that 615 hedge funds closed their doors during the twelve months between March 2008 and March 2009. That's 36 percent of the 1,732 funds that received a star rating from Morningstar in 2008.

The amount one needed to earn to be in the top 25 dropped like a stone. In 2007 to end up on the list one had to earn at least $360 million, but in 2008 the lowest earner made $75 million. Still not a bad pay check. The next question is what hedge fund managers will earn in 2009.

"The golden age for hedge funds is gone, but it's still three times more lucrative than working at a mutual fund and most other places on Wall Street," Robert Sloan, managing partner of S3 Partners, told The New York Times.

Congress has been talking about making changes to the way hedge fund earnings are taxed. Right now the hedge fund's management fees are taxed as ordinary income, but a large portion of what hedge fund managers make is taxed as long-term capital gains at a rate of just 15 percent.

Lita Epstein has written about 25 books including "Trading for Dummies" and the "Complete Idiot's Guide to Value Investing."
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