Hedge Fund Pay That Will Make Your Head Hurt

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I'm about to tell you something that could make you upset. You might want to sit down for this one. Finish chewing before you continue so you don't choke. If there are kids in the room, it's time for earmuffs. This will shock you:

There are people in this country who will make more money during your lunch break than you might make over the next several years.

It's true
In the glamorous world of hedge funds, 2007 marked a record year of management compensation far beyond most people's comprehension. While Apple (Nasdaq: AAPL) CEO Steve Jobs and the two Google (Nasdaq: GOOG) co-founders command simple $1 salaries, some high-flying hedge fund mangers are a tad less modest, pulling down up to $10 million every single day.

The five highest paid hedge fund managers of 2007

Manager	2007 Pay
John Paulson	$3.7 billion
George Soros	$2.9 billion
James Simons	$2.8 billion
Philip Falcone	$1.7 billion
Ken Griffin	$1.5 billion

*Source: Alpha Magazine.

Your eyes aren't deceiving you: The top five hedge fund managers took home a combined $12.6 billion in 2007. That isn't their net worth; it was their annual pay.

Let's break down how much $12.6 billion is:

• Enough money to cover all government expenditures -- Social Security, Medicare, education, defense, transportation, homeland security, interest payments on debt, state, local, everything -- for about 22 hours.
• Enough money to give nearly $15 to each of the 852 million people (per the U.N. in 2006) worldwide who don't get enough food to sustain a healthy life.
• Enough to write a $6,300 check for each of the two million Americans staring at foreclosure this year.
• Twice as much as Coca-Cola (NYSE: KO) made in 2007.

How on Earth did they do it? While hedge funds are notoriously secretive about their holdings, we do know a few tidbits. John Paulson, who took home the biggest bounty, correctly bet that the value of mortgage-related products would fall in value, sending one of his funds up a staggering 590% in 2007. Ken Griffin, who heads Chicago-based Citadel Investment Group, made a widely followed investment in troubled online broker E*Trade (NYSE: ETFC) late last year. And Jim Simons, an MIT graduate with a PhD in math, used the market's instability to score a 73% return in one of his computer-driven quantitative funds during 2007.

Welcome to the good life
All this talk about billion-dollar paydays begs the question, what do you do with all that cash? With such staggering wealth, giving away money for charitable purposes becomes a standard affair. Soros, for example, has donated more than $4 billion during his lifetime, according to PBS. With Microsoft's (Nasdaq: MSFT) Bill Gates and Berkshire Hathaway (NYSE: BRK-A) chief Warren Buffett joining forces to grow the Bill and Melinda Gates foundation to $38.7 billion in assets at the end of 2007, philanthropy among the world's richest might be seen as more in vogue.

But yes, of course, with incredible pay comes an equally impressive lifestyle. A recent article in the Wall Street Journal reported on a study of 188 hedge fund managers in which they were asked how much they spent over the past year on specific items. When they spend, they spend big; Those who spent money on a specific category dropped an average of $4 million on art, $582,000 on jewelry, $318,000 on watches, $135,200 on spa services, and $94,000 entertaining friends (congrats if you're one of them). Maybe money can't buy happiness, but apparently it can buy a darn good back massage.

Final foolish thoughts
It's important to remember these guys are the creme de la creme of the money management world. Unlike some CEOs who can leave their company in peril and walk away with a gazillion-dollar golden parachute, hedge fund mangers only make the big bucks when their clients are rewarded with equally impressive returns.

Nevertheless, the fact that anyone can make such an insane amount of money in one year highlights what might be a disturbing trend: The amount of prosperity that is solely reliant on the financial market is tremendously large. When that much power is placed in the hands of a few people, even a slight misstep can send the entire market into a tailspin.

Could one fund's actions really harm the entire financial system? You bet, it has happened before.

Now, if you'll excuse me, I have to find out why none of my friends has spent $94,000 entertaining me in the past year.

• For related Foolishness:
• The Death of the American Billionaire
• How to Become a Billionaire
• Battle of the Billionaires