Billionaire hedge fund manager John Paulson, whose bet against the overheated housing market made him one of the world's wealthiest people, became a lot richer last year.

By earning an estimated $5 billion in 2010 thanks to bets the economy would recover, the 55-year old investor likely set a new record for the $1.9 trillion hedge fund industry's biggest-ever annual payday. He beat his own record, which he set in 2007 with a $4 billion haul made off the subprime bet.

The Wall Street Journal first reported Paulson's payout in its Friday edition, and investors familiar with Paulson's portfolios said the number is likely correct given the manager's asset size and his recent profitable bets on Citigroup and gold.

For Paulson, the payday comes after he reversed deep losses in his funds halfway through the year, and it may put to rest lingering talk that his investing prowess was limited to a lucky bet during the subprime era, investors said.

He did it on the short side and on the long side, said Brad Alford, founder of Alpha Capital Management, which invests with hedge funds. He proved that he can really do it all.

Other prominent managers like Appaloosa Management's David Tepper and Bridgewater Associates' Ray Dalio likely also earned 10-figure paychecks, the Journal reported.


But Paulson and other managers' eye-popping earnings are sure to raise new questions about how managers are paid in an industry known for charging hefty fees that often guarantee generous payouts even if returns were merely average.

Last year, the average hedge fund gained 10.5 percent, lagging the Standard & Poor's 500 index by 15 percent and falling short of their own 19 percent return in 2009, data from Hedge Fund Research show. But managers will collect 2 percent management fees and about a 20 percent cut of their gains.

By definition, this raises the payouts for managers at the industry's biggest firms.

In Paulson's case, the fact that his 17-year old firm Paulson & Co oversees about $35 billion fattened up his payout. To be fair, Paulson also invests his entire fortune in his funds and since his gold fund gained 35 percent, his investment gains added billions to his payout.

For other managers, including ones who lost money, however, the industry' payouts may seem less fair, investors and analysts said.

People are fine with hedge fund fee structures as long as they are making great returns, said Stewart Massey, who invests with hedge funds at Massey, Quick & Co. But where they get antsy is where managers have middling returns and the managers are still making a lot of money.

As hedge funds look for new investors, experts say that investors' demands on pay will hold more sway. A push from some investors to set a so-called hurdle rate, or minimum accepted rate of return, for manager pay, or to reward them only if they exceed certain benchmarks may gain traction.


The big paydays at hedge funds are likely to confirm that hedge funds can be modern-day gold mines on Wall Street and spark even more movement from the world of banking and mutual fund management into this asset class.

Many of these big hedge fund managers are now earning more than professional athletes, said Kenneth Murray, president of Mercury Partners, which recruits staff for hedge funds. And they can do this for the rest of their lives, unlike sports stars who have to find another job after the age of 35.... 100 percent, hedge funds are the places where everyone wants to be.

But he and other recruiters agreed that the hedge fund industry's biggest payouts really will be limited to its biggest stars, noting that working at a hedge fund is no longer a sure way to easy riches.

As the industry matures, these people said that it is becoming harder for newcomers to break in and that portfolio managers need to bring long records of top performance before getting a job. Also with investors becoming pickier, it is harder to raise a lot of money.

If you've been in the game and successful, you may be set for life, but for everyone else it is becoming tougher, Murray said.

(Editing by Robert MacMillan)