12/30/12

I was out last night having drinks with a few energy traders at a HF I am applying to for an entry level position. Clearly these guys make a lot of money especially the owner.

After some drinks one of the traders said, "Listen this is an opportunity of a lifetime, I made a $1.5mm bonus last year and this year it will be closer to $2mm." On top of that his base is 150k

The fund is not in a big city, or wealthy area, and adjusted for cost of living that's more like $4-5mm bonus in NYC and 350k base.

With the opportunity in 2 years to become a trader I obviously was shocked at that number.

Is that a real figure? or was that booze and bullshit talking?

Comments (20)

12/29/12

I dont think you can adjust $2mm up to $5mm for 'cost of living'. The more money you earn, the less effect CoL differences have.

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12/29/12

Maybe Cost of living wasn't the best comparison but quality of lifestyle on 2mm here would be easily equivalent to $4-5mm in NYC. A $500,000 house here is brand new, 4 bedroom, 5,000 sq feet, 3 car garage, and comes with acres of land. Compare that to what you would live in in NYC. Going out to dinner would cost half if not 1/4 of what a nice dinner would cost in NYC.

12/29/12

Mix of both, I guess. Energy Traders make crazy amounts of money.

12/29/12

Walkio:
Mix of both, I guess. Energy Traders make crazy amounts of money.

The majority of energy traders don't make bank. They're comp is extremely performance based, which means that the average trader and below (ie 50% of all energy traders) do pretty poorly. If I had to guess, it sounds like this shop is having a good couple years or the guy is bullshitting OP. If they truly had a long-run winning strategy, they'd probably offer a higher salary as percentage of all-in comp
12/29/12

gammaovertheta:
Walkio:
Mix of both, I guess. Energy Traders make crazy amounts of money.

The majority of energy traders don't make bank. They're comp is extremely performance based, which means that the average trader and below (ie 50% of all energy traders) do pretty poorly. If I had to guess, it sounds like this shop is having a good couple years or the guy is bullshitting OP. If they truly had a long-run winning strategy, they'd probably offer a higher salary as percentage of all-in comp

150k base salary is pretty standard for any hedge fund trader/PM even at places that have been around for decades...I wouldnt expect a PM to get more then that. and it doesnt even matter because this "salary" is likely a draw where u owe it back if u dont make any money...ie if u get paid out 15% of PnL ur first 1MM just covers your draw and then you start making more money after that. I think this guy probably had a good couple of years, had a few drinks, and was shooting his mouth off but the numbers dont sound absurd to me.

12/29/12

Great.

Re: COLA though- a lot of people would prefer $2M and living in NYC over $2M and living in a small city. Many people are happy in a small apartment vs. a house.

12/29/12

the numbers arent unrealistic but understand that those guys have to make money trading to get paid...ie could easily be a 0 next year if things dont go right. And 2MM in NYC is certainly enuff to live very very well indeed as long as you dont have a bunch of kids.

12/30/12

Bondarb:
the numbers arent unrealistic but understand that those guys have to make money trading to get paid...ie could easily be a 0 next year if things dont go right. And 2MM in NYC is certainly enuff to live very very well indeed as long as you dont have a bunch of kids.

2MM/year at NYC tax rate will leave the guy around 1 MM after taxes.
In PE with equivalent performance one gets to keep 1.6MM out of the 2MM aka 8MM out of 10MM by year 5/profit distribution). And then there are other tricks that one can pull to further reduce the taxable amount via IRA etc. as Romney demonstrated.
I guess from a tax perspective PE/RE is advantageous over HF.
Assuming that capital gain tax rate goes back to 20% and top marginal rate for $1m+ income back to 39.6% which will be in the case of 2013 in all likelihood.

Also many thanks for pointing out that for a trader/PM the base salary is basically a draw on trade profits. This is similar to how how brokers get draws from their firm which are then deducted from the commissions once they start closing sales.
This type of arrangement makes it fair and equitable for both sides. It also means that the new trader needs to start making money for the firm soon else his employer might not feel comfortable keeping paying him "draws" for much longer.

Too late for second-guessing Too late to go back to sleep.

12/29/12

pgaap1919:

After some drinks one of the traders said, "Listen this is an opportunity of a lifetime, I made a $1.5mm bonus last year and this year it will be closer to $2mm." On top of that his base is 150k

Is that a real figure? or was that booze and bullshit talking?

Well... those numbers are possible. Energy markets can be very profitable, but that bonus is not the average.

12/29/12

Just do the math, if he's running money at a Hf, he could conservatively get 10% of his profits (assuming the Hf charges 20%). If he's running 100m (realistic amt) and a good year is +20% gross (20m revenue) there's the 2m right there. Running more money and/or a higher payout, all the better. Nice position to have...

12/29/12

I'm guessing this is in Texas/Oklahoma.

12/29/12

It is in Pennsylvania.

See my other post ( http://www.wallstreetoasis.com/forums/pwm-or-energy-trading) I am currently looking at both options. Just wanted to see everyone thoughts on that bonus. I definitely knew it was possible but wanted to know how realistic it was.

12/29/12

The bonus is realistic. However given how energy funds didn't do to well this year. I am surprised about the bonus numbers. From looking at your previous thread, I think you should take this offer. These guys are doing something well, seeing how must energy funds are going to finish in the negative or barely positive.

12/30/12

Bonuses of employees in PE funds are taxed as ordinary income I think. I really think only the principals are tax advantaged but i could be wrong.

12/30/12

Bondarb:
Bonuses of employees in PE funds are taxed as ordinary income I think. I really think only the principals are tax advantaged but i could be wrong.

Right. Bonus are ordinary income but I was referring to carried interests, hence the 5 year profit distribution period.
Sorry about the confusion. I think 2 MM/year bonus would be rather rare in PE except C-level folks at mega-funds. Most of the money come from carried interests during distributions.

Too late for second-guessing Too late to go back to sleep.

12/30/12

brandon st randy:
Bondarb:
Bonuses of employees in PE funds are taxed as ordinary income I think. I really think only the principals are tax advantaged but i could be wrong.

Right. Bonus are ordinary income but I was referring to carried interests, hence the 5 year profit distribution period.
Sorry about the confusion. I think 2 MM/year bonus would be rather rare in PE except C-level folks at mega-funds. Most of the money come from carried interests during distributions.

I believe at a HF if you are the general partner (ie the principal) you also get the carried interest rate...however indiviudual PMs are paid as ordinary income.

12/31/12

Bondarb:
brandon st randy:
Bondarb:
Bonuses of employees in PE funds are taxed as ordinary income I think. I really think only the principals are tax advantaged but i could be wrong.

Right. Bonus are ordinary income but I was referring to carried interests, hence the 5 year profit distribution period.
Sorry about the confusion. I think 2 MM/year bonus would be rather rare in PE except C-level folks at mega-funds. Most of the money come from carried interests during distributions.

I believe at a HF if you are the general partner (ie the principal) you also get the carried interest rate...however indiviudual PMs are paid as ordinary income.


I think this depends on the HF's strategy, long term investing would be taxed as capital gains, while short term is taxed as ordinary income
12/31/12

carried interest - profit distributions from a partnership are taxed as LT cap gains. This is why some in DC want to change the tax code. If you are a GP of a HF that day trades, your distributions will be treated as LT even though all of your profitable trading activity is ST gains.

LPs pay taxes based on the actual calculation of profits realized as either ST or LT gains.

On the bonuses, 7-figure bonuses for young or old guys/gals are possible if you are generating the returns. That said, this obviously isn't the norm, and don't think that when you are in their position, you would earn anything near that just for occupying a seat. On another recent forum post about the value of an MBA, someone made some comment about how with an MBA from HBS, you'd likely have 8-figures in the bank in 20 years.

The reality is that you could be the smartest or the stupidest person in the room, but if you find a way to make money, the sky is the limit. If you are ivy/HBS, nicest guy in the world, but don't generate returns, you'll be out the door and you'll never make a career on the buyside.

A boss of mine put it well - "I'm not running this fund and paying your salary to surround myself with my friends".

12/31/12

The GP basically gets pass through treatment as if he/she owned the underlying securities. The greatest benefit is usually to PE investors.

From Wikipedia:

Because the manager is compensated with a profits interest in the fund, the bulk of his or her income from the fund is taxed, not as compensation for services, but as a return on investment. Typically, when a partner receives a profits interest (commonly referred to as a "carried interest"), the partner is not taxed upon receipt, due to the difficulty of ascertaining the present value of an interest in future profits.[3] Instead, the partner is taxed as the partnership earns income. In the case of a hedge fund, this means that the partner defers taxation on the income that the hedge fund earns, which is typically ordinary income (or possibly short-term capital gains, which are taxed the same as ordinary income), due to the nature of the investments most hedge funds make. Private equity funds, however, typically invest on a longer horizon, with the result that income earned by the funds is long-term capital gain, taxable to individuals at a maximum 15% rate. Because the 20% profits share typically is the bulk of the manager's compensation and because this compensation can reach, in the case of the most successful funds, enormous figures, concern has been raised, both in the U.S. Congress and in the media, that managers are taking advantage of tax loopholes to receive what is effectively a salary without paying the ordinary 35% marginal income tax rates that an average person would have to pay on such income.

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