Stockpickr: The Top 10 Hedge Fund Managers

James Altucher

Trader Monthly magazine has released its list of the top hedge fund managers ranked by how much money each made personally in 2006.

Let me just state right off the bat that I'm jealous. And how can you not be jealous of anybody who makes $1.5 billion, as John Arnold of Centaurus Energy did last year? It does make me feel better realizing he's probably going to pay about 50% in taxes, so the take-home figure is likely around $750 million. But still.

It's worth noting that most, if not all, of the managers on the list made it because they are the best investors. Interestingly, most of them are long-term investors whose positions we can follow and potentially piggyback.

(Just as a footnote, when we began brainstorming the idea of Stockpickr.com, we considered creating a closed-end fund based on piggybacking the top two to top five positions of each top hedge fund. I still believe it's an interesting idea -- in other words, I would invest in it. But we focused our efforts on creating Stockpickr.com instead.)

1. John Arnold, Centaurus Energy

The No. 1 manager, John Arnold, offers a tricky model to follow because he trades only energy futures, and my guess is he's a very short-term trader. A guy such as Arnold probably takes huge risks. So far, so good -- those risks have been working out for him. But we don't necessarily want to emulate him, because his strategy can blow up, as super hedge fund Amaranth did last year.

Let's take a look at the other managers in the top 10.

2. Jim Simons, Renaissance Technologies

Jim Simons of Renaissance Technologies, whom I've written about many times in the past, made an estimated $1.5 billion to $2 billion for himself last year. You can check out Renaissance Technologies' page on Stockpickr for some of his top holdings and to see which positions we feel are the fund's long-term holdings.

My theory has been that Renaissance has been loading up on companies with huge cash positions and little debt. Renaissance is a quant-oriented shop that has probably determined that these are the types of companies that outperform over the long run because they have little risk of going out of business due to their large cash positions. Examples from his portfolio are Merck(MRK) and Lockheed Martin(LMT).

3. Eddie Lampert, ESL Investments

Eddie Lampert from ESL Investments ranks third, with an income estimated at $1 billion to $1.5 billion. Lampert follows the classic Warren Buffett technique: Take over a company with large cash flows and start allocating that money. Eventually, if you are a good allocator the best use of capital will be your investments rather than building out new stores.

Besides Sears Holdings (SHLD), Lampert is also big in AutoZone(AZO) and AutoNation(AN). To see his holdings, check out Lampert's page on Stockpickr.

4. T. Boone Pickens, BP Capital

T. Boone Pickens, who was No. 1 on the list in 2005 with income of $1.5 billion, ranked No. 4 in 2006 with an estimated income of $1 billion to $1.5 billion. Pickens is the master of peak oil theory, the idea that the world is eventually going to run out of oil. So he loads up on stocks that are likely to benefit from this anticipated decline in supply.

So far, Pickens has been dead on. His BP Capital can be viewed as a peak oil index. Among his positions are Schlumberger(SLB) and Transocean(RIG).

5. Stevie Cohen, SAC Capital

Stevie Cohen, manager of SAC Capital, is one of my favorite hedge fund managers to piggyback. At No. 5, he made a solid $1 billion last year, but I don't believe that figure takes into account the fact that around half of his $12 billion hedge fund, which he started from scratch in 1992, is his own money.

Lately, Cohen has been following a strategy similar to the one we've been advocating with Stockpickr. In other words, he's been piggybacking the positions of some of his buddies. For instance, he joined Carl Icahn in taking an active position in Time Warner(TWX). More recently, he's joined with several investors on taking an activist role in Take-Two Interactive(TTWO). Check out SAC Capital's top positions on Stockpickr.

7. Paul Tudor Jones, Tudor Investment

Paul Tudor Jones weighs in at No. 7 with income of $700 million to $800 million. Track his portfolio at Tudor Investment's page on Stockpickr.

8. Bruce Kovner, Caxton Associates

Bruce Kovner ranks No. 8 with 2006 income of $700 million to $800 million. We keep track of Kovner on the Caxton Associates page on Stockpickr.

9. Izzy Englander, Millennium Partners

Izzy Englander from Millennium Partners made $600 million to $700 million last year. I've had the opportunity to meet Englander's organization several times over the past few years. The main thing that's struck me about the fund's strategy is that it's very focused on avoiding risk. It tracks every position across hundreds of traders, and when it puts on a position, it focuses on how to hedge that position. For instance, if you have a system that suggests you go long Johnson & Johnson(JNJ), then there had better be a counter position you can take on as a short (for example, a pharmaceutical exchange-traded fund).

We track Englander's "most interesting" positions at the Millennium Partners page on Stockpickr. It's not good enough to just track Milllennium's top positions. This is useless to us as investors because the fund is such a heavy trader. However, we specifically put in the top positions that meet the following other criteria:

• Those companies for which he owns more than 1% of the outstanding shares of the stock.
• Those companies in which he increased his position as of the fund's latest regulatory filing.

The idea behind these criteria is that these are positions for which Englander's Millennium is more likely to be a long-term holder.

10. David Shaw, D.E. Shaw

David Shaw weighs in at No. 10 with a personal income of $600 million to $700 million last year. His D.E. Shaw is a notoriously secretive quant firm. A few years ago, I met a guy who had traded there and who'd sat right by Jeff Bezos, before the days of Amazon(AMZN). He threw a few dollars to invest in Bezos' crazy idea when Bezos took off for Seattle to launch Amazon.

Now, several hundred million dollars later, this guy no longer has to trade, but he described to me how exciting it was for him to look at the stats page each day for Amazon and see how quickly the company -- and his investment -- was growing. I'm almost more jealous of that feeling than any of the egregious incomes on this list.

On another note, I spoke yesterday with someone at a fund of funds invested in D.E. Shaw who told me that whenever that fund's management visits the D.E. Shaw offices, it is told absolutely zero about what the investment strategy is.

That said, D.E. Shaw is required to file a list of its holdings every quarter. We keep track of the holdings, which seldom change (implying they are long-term investments), at the D.E. Shaw portfolio page on Stockpickr.

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