Top-earning hedge-fund managers just had their leanest year
for compensation since 2005, according to the annual Rich List
released Tuesday by Institutional Investors Alpha.
The top 25 individual earners reaped $11 billion in combined
compensation in 2016, based on their personal fund stakes and
share of management and performance fees, and hedge-fund
investors had no sympathy when told Alphas findings.
I would like to see more of that income being
generated from managers own investments in their
funds, said Robert Lee, Texas Tech Universitys
deputy chief investment officer. I highly suspect that
the lower numbers come from missed management fees over missed
incentive fees, said Lee, whos also a board member
at the Alignment of Interest Association, a non-profit group
that advocates for fair deals between hedge funds and their
Performance does not matter as much as it used to for hedge
fund managers personal wealth, according to Stephen Taub,
Alphas longtime reporter and architect of the Rich List.
Nearly half of the 25 highest earners made the list despite
leading their flagship funds to single-digit returns in
In a year with meagre industry alpha, many investors are
worried that hedge-fund fees reward fund managers regardless of
I think that weve become better at measuring
alpha, but were no better at compensating managers based
on it, Lee said. The Alignment of Interest Association
pushes for compensation based on investing skill rather than
market performance, he said, and there is still much
progress to be made.
While Lee works to improve the hedge-fund model, many
investors have examined the sector in its current state, and
passed. Aflacs CIO Eric Kirsch, for example, is building
an alternatives program for the insurers $100 billion
portfolio without including hedge funds.
The value proposition has morphed and changed,
Kirsch said. Markets have continued to become very, very
efficient, and its clearly more difficult for hedge funds
to produce alpha than it was 20 or 30 years ago.
Kirsch cautioned that hell never say never
on an asset class. But in the current economic cycle, and with
cost-benefit tradeoffs unique to insurance investors, he said
that its not a fit.
For the third straight year, asset allocators pulled more
money from hedge funds in 2016 than they invested. And that
trend has some managers embracing fee reforms that investors
have been agitating for.
We are getting offered better fee deals, and the
managers are being proactive about it, said Ryan Bailey, senior investment director at
Childrens Medical Center in Dallas. I think
thats them recognizing 2-and-20 is no longer market rate,
and they would rather be in control of that conversation than
having the allocator approaching them.
Hedge fund managers have traditionally charged 2 percent for
managing investors capital and 20 percent of any
Quantitative hedge funds may be feeling the pressure less
than traditional managers. Firms with quant strategies had
strong representation in the Rich Lists top 10, including
Renaissance Technologies (No. 1), Two Sigma (No. 2 and No. 3),
and D.E. Shaw (No. 9). Investment consultant Greg Dowling of Fund
Evaluation Group called the quant-heavy leaderboard
noteworthy, saying that hes definitely
seen quants rising over the last couple of years, and even
firms not traditionally quantitative have pushed the envelope
in that space.
On the hedge-fund industrys declining performance,
Dowling echoed investors view that managers can put up or
Hedge funds are Darwinistic: if managers do a great
job, they get rewarded. If they dont do, eventually
theyre out, he said. There is no monopoly in
hedge funds. And the compensation structure is a part of