One of the beauties of the hedge fund management industry is its (relatively speaking) low overhead. As a result, it is typical for more than 40 percent of revenues (the standard percentage at a bank) to end up in the bonus kitty. As the average hedge fund charges a 2 percent management fee and a 20 percent performance fee, that can work out to be quite a chunk of change. Also, unlike the majority of banks these days, most hedge funds are not publicly traded companies and they do not have regulators and politicians looking over their shoulders to see how they pay their people. As a result, unlike Goldman Sachs, which had to cut its bonus pool down to 39 percent of 2009 operating revenues, hedge funds are free to pay up.
The people making the big money, of course, are hedge fund partners. I recently spoke to a handful of fund partners about their compensation. Most retracted, but the partners who did share their expectations plan to make anywhere from $10 million to over $100 million on their 2009 profits, with some estimates of the elite earning over $1 billion. These numbers are at the extreme end of the scale, although the more typical partners at a hedge fund (that did well) ranging at $1 billion to $30 billion in assets will make between 5 to $25 million. (These numbers are mostly estimates from hedge fund employees I have spoken to.) I am sure there will be new Gulfstream’s, Hatteras yachts, Havana Club memberships, and Lamborghinis this spring. Not to mention the Hamptons and Greenwich mansions that will pop up along with the new Fisher Island ferry cruisers. I hear if you flash your high beams, they will wipe away your salt, but not your dry powder.
As for the rank and file employees, I was asked recently by a senior portfolio manager of a $9 billion New York-based hedge fund,” How do bonuses look this year?” My answer was: contrasting. Not to state the obvious, but if you were at a fund that did well, you’ll do well, and maybe very well. As for the successful firms bonuses are back to 2007 levels, meaning analysts will make from one to five times their base pay, averaging $480,000, and portfolio managers will make their pre-agreed formula, ranging from $1 million to $100 million, averaging $7 million. But remember, these are $1 billion-plus firms that did well.
It remains, however, that 30 percent of hedge funds are still “under water”, says Hedge Fund Research. A fund which has yet to breach its high water mark or which only recently got back to the level it was at before its 2008 losses, has less wealth to share. Under water funds typically cannot start charging performance fees until that magic number is passed. As a result, the only money coming into the fund is usually the two percent management fee – the money that keeps the lights on and the computer systems running.
For these funds still getting their heads above water, the situation is much more on a case-by-case basis. Some partners are choosing to forgo their own bonuses to pay hard working employees, who in some cases drove the returns last year and may even have forgone bonuses in 2008. In other cases, disgruntled portfolio managers complain that the partners are keeping all the wealth there is to themselves, thus leaving staff with little more than their annual base pay.
Now the game of musical chairs begins. Hedge fund executives are taking a closer look at the available talent pool now that their firms have the numbers for their 2009 pay out. Even professionals at the major banks are paying attention to the hedge fund job market now that it appears news of the industry’s demise (or, at least, its new found poverty) was greatly exaggerated.
John Pierson is the founder of 10X Partners, a hedge fund recruiting firm based in New York. For more information, visit the company Web site at www.10xcap.com.
