The second LwH Prize goes to… John Paulson

The ranking for the 2007 highest-paid hedge fund managers came our and we found out that John Paulson, founder of New York-based Paulson & Co, was paid an estimated $3.7b last year. The 52-year old New Yorker, beat George Soros and 2006’s top earner James Simons. Soros ranked second, earning about $2.9 billion. Simons was third, making an estimated $2.8 billion last year.

Paulson & Co. made money betting on the collapse of subprime mortgages in 2007. According to investor letters obtained by Bloomberg, the Paulson Credit Opportunities Fund soared almost six fold, helped by bets on slumping housing and subprime mortgage prices.

Hedge funds are mostly private and unregulated pools of capital where managers can buy or sell any assets, participating substantially in the profits of the money invested. Their managers make most of their compensation by keeping a percentage of profits, typically 20 per cent. The get no performance fees unless their returns are positive, though they do typically keep a 2 per cent management fee.

After a dreadful 2008Q1, this 20/2 compensation scheme has been under fire since managers share on gains but not on loses.

Top 10 moneymakers in the hedge-fund industry in 2007

1 $3.7b, John Paulson, Paulson & Co
2 $2.9b, George Soros, Soros Fund Management
3 $2.8b, James Simons, Renaissance Technologies Corp.
4 $1.7b, Philip Falcone, Harbinger Capital Partners
5 $1.5b, Kenneth Griffin, Citadel Investment Group
6 $900m, Steven Cohen, SAC Capital Advisors
7 $750m, Timothy Barakett, Atticus Capital
8 $710m, Stephen Mandel Jr, Lone Pine Capital
9 $625m, John Griffin, Blue Ridge Capital
10 $520m, Andreas Halvorsen, Viking Global Investors

If these 10 men were a country, their GDP (ppp) would sit right above Zambia, Chad and Nicaragua and right below Mozambique, Armenia and Burkina Faso. John Paulson alone made more in 2007 than 30 other nations in the world! As usual, headline-grabbing news never tell you, so I don’t know, but I guess we are talking gross take-home income here. in gross terms, Mr Paulson alone “produced” more than Fiji in 2007!

Paulson has a smart guy’s career. He was a partner at New York based investment firm Gruss Partners and a former managing director at Bear Stearns Cos. He also has a masters degree in business from Harvard Business School.

It definitely takes guts to bet against the mob, and John seems to have what it takes. I just wish I could have the chance to find out what it takes clear the noise and make decisions based in fundamentals.

From my side, I stopped paying attention to everyday news and starting to read a bit more of history. I hope it will help.

For all that, I award Mr Paulson with the second LwH Prize!

Congratulations John!



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