Ken Griffin, founder and CEO of Citadel
Photograph by Heidi Gutman — CNBC/NBCU Photo Bank via Getty Images
By Stephen Gandel
May 5, 2015

Only in the world of hedge funds would a year in which the top managers were paid a collective $11.6 billion be considered a disappointment. 2014 wasn’t just a bad year, it was one of the worst. That’s what hedge funds made in 2008.

On Tuesday, Institutional Investor unveiled its ‘Rich List’ of the highest paid hedge fund managers. Ken Griffin, who heads Citidel, a Chicago based fund company, was at the top of the list, at $1.3 billion. He was followed by James Simmons, who doesn’t even run his hedge fund anymore. He made $1.2 billion last year.

The 25 top hedge funders on the list made an average of $467 million in 2014. The $11.6 billion total haul was half of what hedge funders made in 2013, which was just over $21 billion.

Wall Street has a weird sense of pride about the notion of pay for performance. And they demand that of the companies they invest in. So, on the face of it, this seems like a good example of that principle in action. Hedge funds had a bad year in 2014. Depending on what index you look at, the average hedge fund was up around 3%. That was less than half the just over 7% return hedge funds brought in the year before that. So, it makes sense their pay was chopped in half.

But there’s a problem with Wall Street pay for performance. The scale is highly subjective, pay is always measured and judged based on what someone made last year. If a hedge fund made its pay for performance decisions based on the S&P 500, which was up nearly 14% last year, then fund execs should have seen their pay cut by even more than half.

Take David Tepper of Appaloosa Management. In 2013, he was the highest paid hedge fund manager, making $3.5 billion in one year. That year, his fund was up 42%. Last year, the fund was up 2.2%, and Tepper made $400 million, which is much less than $3.5 billion. So, perhaps that makes sense, though $175 million would make more sense (5% of $3.5 billion). But Tepper did worse than the market, far worse. And he made less than the average hedge fund manager. Perhaps he should have made nothing last year. Some hedge funds do have hurdle rates that managers have to beat before they get paid.

The best performing manager on this year’s list was Bill Ackman, whose fund Pershing Square was up about 40% last year. He wasn’t the highest paid manager, though. He was No. 4. Of course, Ackman has nothing to cry about. He made $950 million last year.

The point is if you want to make performance matter, you have to make it really matter. $400 million is a tails you win, heads you win situation. The other takeaway from all of this? You can make a lot of money as a hedge fund manager.

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