Key Takeaways
- • Top 25 hedge fund managers earned an average of $467 million in 2014, down 45% from $846 million in 2013, reflecting difficult market conditions and compressed returns across the industry.
- • Massachusetts-based hedge fund leaders Bruce Jacobson (Highfields Capital, $12.5B AUM) and Seth Klarman (Baupost Group, $28.5B AUM) ranked 50th and 26th respectively among top earners, with estimated compensation of approximately $50 million and $170 million.
- • Three hedge fund managers exceeded $1 billion in compensation despite the challenging year, while the broader hedge fund industry averaged returns of only 2.9% against the S&P 500's 13.7% gain, highlighting sector underperformance.
- • Baupost Group delivered 7-8% returns by opportunistically deploying capital into undervalued sectors, particularly energy investments that declined sharply during the period, demonstrating value-oriented strategies outperformed broader equity indices.
- • Compensation declines reflect the structural challenges facing hedge funds when equity markets rise substantially, as many funds employ strategies—short selling, sector rotation, commodities exposure—that underperform in strong bull markets.
Summary
The hedge fund industry experienced significant compensation pressure in 2014 as managers contended with difficult market conditions and mediocre returns relative to public equities. According to Institutional Investor calculations, the top 25 hedge fund managers earned an average of $467 million, representing a steep 45% decline from $846 million in 2013. Despite this substantial pullback, compensation remained extraordinarily high by conventional standards, underscoring the outsized economics of elite fund management even during periods of underperformance.
Among Massachusetts investors, Bruce Jacobson of Highfields Capital ranked near the bottom of the top 50 earners with estimated compensation around $50 million—itself described as "spectacular" by conventional measures, yet representing only one-tenth of his prior-year earnings. Highfields, managing $12.5 billion in assets, generated only low-single-digit percentage returns. Seth Klarman, chief executive of Baupost Group, ranked 26th among top earners with $170 million in estimated compensation. Baupost, one of Boston's largest hedge funds with $28.5 billion under management, delivered 7-8% returns by adopting opportunistic positions in depressed asset classes, particularly energy investments that experienced significant declines during the year.
The industry-wide performance backdrop explains the compression in top-tier compensation. According to the Barclay Hedge Fund Index, the average hedge fund returned 2.9% in 2014, a stark contrast to the S&P 500's 13.7% gain. This structural challenge reflects the reality that many hedge fund strategies—including short selling, sector rotation, commodity positions, and market-neutral approaches—inherently struggle during periods of broad-based equity market strength. Three managers nonetheless surpassed $1 billion in annual compensation despite these headwinds, illustrating the concentration of wealth among elite performers and the continued viability of top-quartile funds even in difficult years.
Among Massachusetts investors, Bruce Jacobson of Highfields Capital ranked near the bottom of the top 50 earners with estimated compensation around $50 million—itself described as "spectacular" by conventional measures, yet representing only one-tenth of his prior-year earnings. Highfields, managing $12.5 billion in assets, generated only low-single-digit percentage returns. Seth Klarman, chief executive of Baupost Group, ranked 26th among top earners with $170 million in estimated compensation. Baupost, one of Boston's largest hedge funds with $28.5 billion under management, delivered 7-8% returns by adopting opportunistic positions in depressed asset classes, particularly energy investments that experienced significant declines during the year.
The industry-wide performance backdrop explains the compression in top-tier compensation. According to the Barclay Hedge Fund Index, the average hedge fund returned 2.9% in 2014, a stark contrast to the S&P 500's 13.7% gain. This structural challenge reflects the reality that many hedge fund strategies—including short selling, sector rotation, commodity positions, and market-neutral approaches—inherently struggle during periods of broad-based equity market strength. Three managers nonetheless surpassed $1 billion in annual compensation despite these headwinds, illustrating the concentration of wealth among elite performers and the continued viability of top-quartile funds even in difficult years.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.