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Who are the top hedge funds in the world? Before we can choose the best hedge fund on the planet, we need to layout the criteria that we use to make the selection.

Hedge funds are already an elite group. As an asset class, they have beaten the S&P 500 by a wide margin over a very long period of time. And there are more than 9,000 hedge funds in existence, these days. So to stand out, the top hedge funds must beat a huge number of hedge funds that have in turn beaten the majority of other fund managers, such as mutual fund managers.

Probably the best criterion for selecting the top hedge fund of all time is the amount of money it has made for its investors over its entire life. Now some might argue that this measure would be biased towards large hedge fund managers and this is correct. It is easier to make $10B if you have a $100B in assets under management than if you had only $10B in AUM, but to get to this size you have to demonstrate superior investment prowess and to continue to generate high returns with more assets under management a fund manager would need a higher level of skill.

I suppose the argument could be made that we should instead select the manager with the highest absolute returns over the longest period of time. But I think that this is a flawed measure, because then it would be biased to the hedge fund manager that decided to keep his fund very small by returning capital every year. It harkens back to Warren Buffett’s claim that if he only had to manage $1 million, he could almost guarantee you that he would make 50% returns a year.

So who are the Top Hedge Funds?

So if we apply the criterion of most money made for their investors, which hedge funds would make the list?

Quantum Endowment Fund

George Soros’ fund is at the very top of the list. Since opening the doors in 1972 it has produced net gains for its investors of $32 billion. This is more money that some small countries make in a year.

Renaissance Medallion Fund

Math professor, Jim Simons’, Medallion Fund has done almost as well as the Quantum Fund. It has produced net gains of $28 billion, since 1982. So it has been open for 10 years less than Soros’ fund and has generated returns that are only $4 billion shy of what Soros did. Not bad at all.

Paulson & Co

Paulson’s hedge fund has also done very well since its humble beginnings in risk arbitrage. Since inception in 1994 it has produced gains of $26 billion dollars in 12 years less time than the Medallion Fund, though Paulson’s more recent performance has not been so good of late.

Moore Capital

Moore which is managed by Louis Bacon is a hedge fund that was founded in 1989. Since inception, it has produced gains of $17 billion for its investors.

ESL

ESL was started by Eddie Lampbert in 1988 and it has generated returns of $15 billion for its investors. As of right now, though, ESL is suffering from weaker than normal performance due to its massive investment in Sears.

The Top Hedge Fund Managers

Now one might argue that the top hedge fund managers are the ones with the highest annualized returns, but I think the simpler way to determine who is the best hedge fund manager is to simply look at the performance fees that they have pulled down. Of course the performance fee is driven by the size of their assets under management and how large of a percentage return that they generate.

So again the thinking is that fund managers who have a lot of money under management have a distinct advantage over their brethren with smaller AUM. But this is not the case because to get a huge AUM they need to perform well to attract more investment. And of course the more money they have to manage, the harder it is to generate a good return.

When put into these terms the top hedge fund managers are George Soros, Jim Simons, David Tepper, Ray Dalio and John Paulson.

Largest Hedge Funds

Now some people might define the top hedge funds to be the biggest hedge funds. And I suppose that using size is somewhat of a valid measure. And so the largest hedge funds in the world are run by Bridgewater, JPMorgan, Man, Paulson and Brevan Howard.

What is the Best Hedge Fund of All Time?

Given that we have looked at hedge funds based on their annualized returns, length of time they have sustained high returns, amount of money made for investors, assets under management and performance fees earned by their managers: what is the best hedge fund of all time?

I think that I would have to go with the Medallion Fund which is managed by Jim Simons of Renaissance Technologies. Yes, it is second to Soros in profits made for its investors, but it made these profits in a shorter period of time. But Simons’ 35% average annualized return edges out Soros’ 30% return, though some might argue that it is for a shorter period. Another factor in this conclusion is due to the way in which their returns were generated. Soros’ returns seem to be driven more by him personally, while Simons’ returns are driven by computer systems have been built by him and a team of people. Since both are getting up in years, my belief is that the Medallion Fund may be able to continue to perform when Simons is out of the picture, but the Quantum Endowment may not do as well without it eponymous founder.

The Bridgewater Hedge Fund was started by Ray Dalio back in 1975. It has $94 billion in assets and is purported to be the largest hedge fund in the world. Rather than catering to wealthy private investors, it primarily manages money for large institutions and pension funds.

Investment Strategy
Like most of the biggest hedge funds, it is located in Connecticut. It manages its All Weather Hedge Fund using a risk parity approach. What this means is that it varies its asset allocation based on the expected risk of an asset class. A less risky asset gets a higher allocation, while a riskier asset gets a lower allocation and leverage may be employed to equilibrate the levels of risk and return.

Bold Predictions
The Bridgewater Hedge Fund gets a lot of credit for being early in predicting the subprime crisis and the global economic panic that later ensued. Dalio created the term D-process to describe the deflationary process of deleveraging brought on by the collapse of the global debt bubble.

Is Bridgewater a Cult?
Dalio is a bit of a controversial figure and some accuse him of running his hedge fund like a cult. But his proponents disagree, saying that the culture of his firm is the key to his investing success. He has written a book of principles that every employee is expected to read. And his firm holds 360 degree review sessions where nothing is held back. He believes that this process helps bring individual weaknesses to light so that they may be corrected.

Obviously, it is difficult to have all of your flaws pointed out to you in front of a large group of people and these sessions can get emotional at times, but it’s hard to argue with the performance that this generates for his hedge fund.

High Turnover
Bridgewater reportedly has an employee turnover rate of 30% per year. This is unusually high for a large hedge fund. Many former employees say that it is a very difficult place to work at and it can be a demoralizing place, because nothing is held back. No one is allowed to talk behind the back of another person. But the firm defends its practices, saying that when you interview former employees you are more likely to hear the bad than the good things about the firm.

How Does Bridgewater Generate Its Returns
According to Dalio, it generates its impressive returns by understanding the economy better than anyone else. By understanding economic history his firm is able to predict how future economic trends will play out and he is then able to position his hedge fund accordingly. And so far his firm has done quite well by capitalizing on this knowledge.