A hedge fund is a managed fund, often with wealthy limited partners as investors, that attempts to beat financial market averages using a variety of investment techniques, among them hedging. Each fund has minimum investment requirements, often as much as $20 million, but as of 2013, after years of underperforming the wider market, some hedge funds have minimum investment requirements of as little as $1,000.
The Essence of a Hedge Fund:
The first hedge fund began in 1949, with little in common with the hedge fund behemoths of the 21st century other than an underlying strategy to keep funds profitably invested in both bull and bear markets through hedging. Hedging in the most fundamental sense is the strategy employed by someone hedging his bets -- that is, making an original investment and then another investment that essentially bets against the original, gaining value as the value of the original investment falls.
Difficulty of Definition:
In order to determine what hedge fund managers make -- not just the fabulously wealthy few, but the average hedge-fund manager and those executives working under him, we need to define hedge fund. This proves difficult. One hedge fund asks "What is a Hedge Fund?" and then lists 14 investment strategies that characterize hedge funds, all of them quite different and none of them necessarily exclusive to hedge funds. Looking at the identification problem more broadly, the same article defines a hedge fund in terms of management intention: "to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions." [Ref 2] This sounds like the goal of any good investor. It may be best simply to say that a hedge fund is a fund that investment professionals think of as a hedge fund, such as the funds named in a 2012 Forbes article, "The Forty Highest-Earning Hedge Fund Managers."
Highest-Paid Managers in 2011:
According to the Forbes article, the highest-paid hedge fund manager in 2011, Raymond Dalio, took home about $3 billion, which amounts to a little over $1 million per hour. The top 10 managers in the Forbes list averaged more than $200 million. Paralleling a few-winners-take-most phenomenon familiar to followers of entertainment and sports, compensation falls rapidly beyond the highly paid few. The least compensated, 40th manager on the Forbes list took home $40 million. This is still a lot of money, but only about an eighth of what Dalio made the same year.
The Real World:
Hearing about the outsized pay of the most highly paid hedge fund managers may be a continuing source of fascination and irritation for ordinary Americans, with annual salaries averaging about $43,000. According to a 2007 Alpha Magazine report, life in the hedge-fund trenches may be less newsworthy, but is still far from average. A senior portfolio manager's mean compensation, with salary and bonus, is slightly over $1.2 million. A junior portfolio manager's compensation is a little over $500,000. Hedge fund traders, risk managers and analysts had compensations ranging widely, from a low of less than $80,000 to a high of over $500,000.