Hedge Fund vs. Long Only Compensation

From reading articles and posts it seems that compensation at long/short hedge funds is typically thought to be quite a bit better (as in much more potential upside) than a long-only fund. However, as an example, if we assume both fund A, which is a typical long/short equity fund, and fund B, which is a long-only fund, have the same performance in a given year (let's say they both earn 15%), then why should their compensation be all that different? Below is the math I went through to try to answer this question - let me know if anyone sees any flaws in assumptions. Note one of the questions I'm trying to answer (which may be tough to answer) is if one had to choose between two offers, one at a long/short fund and the other at a long-only fund, and assuming the long-only fund has much more AUM, when does it make sense to choose the long-only opportunity over the long/short one? That's why below I've intentionally assumed Fund B has double the AUM as Fund A.

Fund A Assumptions: $1bn AUM; 6 investment professionals, 3 back-office professionals, so 9 people total; 2.0% management fee; 20% performance allocation

Fund B Assumptions: $2bn AUM; 6 investment professionals, 3 back-office professionals, so 9 people total; 1.0% management fee; 12.5% performance allocation over MSCI World

Fund A earns an annual management fee of $20 million, or ~$2 million per person. Fund B also earns an annual management fee of $20 million, or ~$2 million per person.

Assuming both funds generate returns of 15% in a given year and the MSCI World returns 7%, then Fund A will earn $30 million in performance allocation, while Fund B will earn $20 million.

Therefore, combining management fees and performance allocations, over the course of the year Fund A earns $50 million, or $5.5 million/person, and Fund B earns $40 million, or $4.4 million/person. Clearly Fund A generates more profit per person, but not by a significant margin, and this may even be countered by Fund B having a better work/life balance given it's a long-only fund (this is just an assumption).

I've heard people say that at long-only funds, it's not uncommon for the senior guys, assuming performance is just okay in a given year, to "only" pull in $300-500k. This came as a surprise to me since, as an example, Fund B is receiving $20 million a year just in management fees. I don't think fund expenses would come in more than a couple million each year, so it seems like there is a significant surplus generated by the management fee that could be paid out to the team as compensation. Unless of course the founder is hoarding most of it and paying himself $10-15 million/year just from management fees alone, which seems excessive given this is before his/her performance is even taken into account, but I suppose it could happen.

My assumption that Fund B earns 8% over the MSCI World is certainly possible, but I imagine this much excess return probably doesn't happen every year (I'm not sure how leverage gets factored into the calculations?), so maybe this assumption is a bit optimistic. But again, even if performance is mediocre, the management fee in this example seems like it would be more than enough to provide even a junior person at the firm, given its relatively lean structure, with great compensation.

To summarize, my main questions are:

1) Does anyone see any major flaws in the assumptions I've made for Fund A and Fund B that would counter my conclusion that long-only funds can also make a lot of money and that even junior people at these funds could expect to receive attractive compensation?
2) Are long-only funds almost always compensated for what they return over a benchmark (in other words relative versus absolute performance for a long/short fund)? Do any long-only funds have an absolute performance allocation instead?
3) Assuming one goes to work for a good sized long-only fund (>$1bn AUM), would it then be possible to move to a long/short fund? I'm guessing long/short funds would prefer to hire from other long/short funds since those people would already be familiar with shorting, but I know of some long/short funds that have dedicated shorting professionals, so for them maybe it's not as big of a deal if someone comes from a long-only background?

Thanks for your help guys in clarifying this for me.

 

Most Long only funds don't have incentive fees, but I don't think the compensation difference is that different over time, and I'd wager the top Long only funds pay better than the average hedge fund (though the vice versa is also likely true)

 

Your assumptions around long only fees are probably on the high end, and operating expense assumptions are low.

That said, top long only shops pay above the range you described even at the senior analyst level let alone top pm positions. $2bn isn't a lot in the long-only world though and probably isn't highly profitable

 

Your cost assumptions for both scenarios are very low. Compliance, back office, fund admin, technology, legal, tax, etc are significant costs and way higher than what people think. Also, most (if not all) long-only fund do not get paid a performance fee (analysts and PMs might have part of their comp tied a benchmark though). Also your performance assumptions are unrealistic, no fund is beating its benchmark by 8% year-after-year.

 

As someone noted, your mgmt fee assumptions are too low for personnel. You are forgetting, IR, admins, compliance, legal, trading, operations, CFO, COO, etc assuming a single manager structure and your traders are not strictly research analysts. Also, your extreme example of a founder hoarding $10-15mm a year is not even remotely accurate. You have to also pay the street in soft dollars, spend $ on third party consulting work / networks, etc. All-in, I can tell you that @ our multi-bn fund, that there isn't any extra money from mgmt fees after soft dollar / salaried positions.

In order to really make the figures you are quoting, you need to be generating positive returns. And a base case of +800bps of alpha after expenses is beyond generous.

 
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