$500m single manager HF P&L and comp
Can anyone please share some insights on cost structure of a SM HF? I can estimate the fee myself, but not sure about the operating costs. I guess the main costs are research expense (any ideas of how much or it varies a lot depends on usage? ), in addition to staff compensation? What are some of the other costs?
Also, could anyone share what's the reasonable comps or how to negotiate comp for someone with c. 10 years work exp (more than 5 years on buyside, tier 1 LO platforms Fido/Cap/Welli/Trowe with strong performance data)
Thanks a lot
Based on the most helpful WSO content, here are some insights on the cost structure and compensation for a single manager hedge fund (SM HF) with a $500 million P&L:
Cost Structure of a Single Manager Hedge Fund:
Research Expenses:
Staff Compensation:
Infrastructure Costs:
Other Costs:
Compensation for Someone with 10 Years of Experience:
General Compensation Structure:
Negotiation Tips:
For more detailed insights, you might want to explore specific threads on WSO or consult with industry professionals who have direct experience with hedge fund compensation and cost structures.
Sources: What I've Learned About Hedge Fund Structure and Compensation, What I've Learned About Hedge Fund Structure and Compensation, AM vs HF: The Business of Our Business, Questions about Single Manager vs Multi Manager HFs, AM vs HF: The Business of Our Business
Bump
Really depends on the strategy. I was in a similar setup management fee margin was 10-20% and most of the profits came from incentive fees.
It is rarely a great situation to be in especially if the fund has been around a while / not in a growth stage / performance is subpar. I would ask for a chunk above your last compensation and keep looking.
Does your view change if the fund has a larger SMA or Long-Only only generating fees? I know many many funds have this structure
On standalone, assuming $500m doing 15% returns @ 1.5% & 20% structure (assuming no hurdle or other bad-guys) that’s $7.5m mgmt fees & $15m performance fees. Assuming 1 PM, 2 senior analysts, 2-3 junior analysts, 2-3 clerical all w/ avg fixed pay of $230k including Bloomberg & healthcare that’s only $1.8m of the fixed. I doubt the investment team is spending $1m/per head for data per year.
Market for a pod sub-PM role at that experience sort of experience seems to be ~10% payout on $15m target PnL (book size subject to risk profile) = $1.5m if performance is good
$500m AUM with a management fee doesn’t seem like it should be too subscale to pay competitively w/ that in a year where analyst & fund are both good. Even if PM takes 2/3 of performance fee, thats still $5m to go around 5 IPs
What’s the big expense I’m missing? Besides potential bad-guys like a hurdle rate, reduced-fee anchor or a lot of partners with GP stakes or something else? If they’re not paying roughly the same as entry level pod and fuzzy line of sight to mid-long term upside, how are they getting skilled ppl?
Oddysey Search puts out a survey that suggests below PM level the all-in pay isn’t that much lower at SM, and fund being up made a bigger difference than SM vs MM if I’m remembering correctly. Haven’t seen it in a couple years
You have to pay the sell-side... my guess is total budget for $500m l/s fund is probably paying the street $2-3m per yr in aggregate so take that out of the fixed off the top as well
Still good math but think that's the only expense I didn't see you cover
You double counted the math in the sub-PM pod example. Should be $500 x 15% x 10% = 10% of PnL, not 10% of the bonus performance fee pool. Would be 7.5 in your example, not 1.5. But 15% is obviously quite difficult in tighter model
15% returns on average is really aggressive that’s like assuming you can do 4-5% year in year out at a pod
I would think of it as founder keeps 100% of mgmt fee profit and 70% of performance fee, so the analyst bonus pool based on fund performance would be:
5%: $1.5m
10%: $3m
15%: $4.5m
To be split amongst however many analysts there are, expenses really aren’t very relevant as long as management fee covers overheads, except maybe for down year bonus that would need to come out of that pool.
Thanks a lot, that's very helpful!
I was told HF incentive structure is a bit different to LO that it's largely performance linked, so can't negotiate an all in package, etc.
Is it normal to ask for a base (these days base of $230k is reasonable?) and then negotiate in terms of points? I was wondering what's a reasonable base and points to ask for?
And when it comes to those fuzzy line of mid-long term upside, it's fuzzy by nature... what do you do? do you ask them to write out "if I do X, then Y in Z years"?
btw, I was told Lone Pine base of $150k (?!) and Viking base of $250k, honestly it seems HF base is flying everywhere... https://h1bdata.info/index.php?em=lone+pine+capital+llc&job=&city=&year…
I guess a large part of cost depends on the usage of data. I heard some HF use very expensive due diligence data / service provider where a single report would cost $20-40k, but I guess $1m/head should be enough.
$500m is unlevered so if assuming 2-3x could lever up to $1-1.5B
this is an interesting discussion - in similar situation as well and considering if I should move from tier 1 LO to a mid sized HF for better exposure, more interesting work and potentially higher pay LT (not bullish on LO outlook which is different to WSO consensus I know)
Anyone in HF industry can please comment on if there are flaws in my thinking? (I'm fully aware of the whole hate of SMHF on WSO so we don't have to repeat that), key things I'd like to understand better is:
- Is $500m HF considered a good / scaled business cus in LO world it's definitely sub sub scale, but my understanding is that HF is different? Esp for shorting, the larger the fund is, the lower the alpha potential?
- in terms of comp, can a $300-500m HF pay competitively? (I know WSOs are fans of multi billion HFs, but I remember there're academic papers suggesting 3-5 size team is the best, and remember in another WSO thread seeing some asset allocator commenting $300-500m HF is the best in terms of alpha generation potential / hunger?)
It would be great if people in HF industry can please comment on mid sized HF vs. LO.
Can you explain your thinking on comp? Why would a $300-500m hf pay more than a $300b+ long only? $300-500m hf is tiny
Here is how I think about this:
- a $500m AUM with a 1.5/15 fee structure should get c. $14m in fee assuming it does 15% return.
- taking off $2-3m research and experts network expense, maybe another $2m for data, there should be still around $10m left
- Assume the PM takes 2/3, that's still about $4-5m left to go around 4-5 IPs, so theoretically still HAS ROOM to pay well if the founder is generous enough (I appreciate whether the founder is willing to pay well is a different story though).
- this is in line with Anchor's comment above "$500m AUM with a management fee doesn’t seem like it should be too subscale to pay competitively". Also if you think intuitively, if they are competing with talent vs. LO, they will have to pay competitively otherwise how do they attract talent?
- and this is even before considering the upside if the fund scale to let's say $1-2bn in a few years' time (I know there is a big IF here, but assuming you want to this small HF because you believe in the founder), then the fee at 15% return will be $25m and $50m respectively - if total investment professional still keep within 5, the upside potential will be huge.
Even putting aside the upside / scalable case, at status quo, I still value the "experience adjusted pay" more than staying at LO because gross pay is not my no. 1 consideration - I just think LO is more of a retirement job, work is less interesting, learning is much less than HF peers which caps your LT competitive advantage especially if you believe the LO industry is in secular decline (which I do), then it becomes a debate of terminal value (SMHF has both near term upside and LT terminal value/optionality of moving to pods or moving back to LO if my assessment of LO outlook is wrong vs. LO terminal value might be 0 or diminishing competitive advantage)
Happy to hear the other side of the debate or feel free to point out any flaws in my logic.
Could you please share your thoughts around how to balance large AUM vs small team? Specially, what's the ideal team size to consider (assuming it's a small number of 3-5?), then acceptable AUM to consider given that small number of IP.
What would be market comp at Citadel if you were coming in with 1 - 2 years of prior HF experience at SM? Would Citadel match a base of 250k?
Probably not $250 base but idk - wrong question though. If you’re at a level to be managing your own coverage and sub book, you should be focused on formula and limits - in reality the downside risk re: your fixed life budget is addressed via guarantee or signing bonus or some other structuring that is still a bit more aligned than base salary
curious how much of the PM's performance pool generally takes at single-manager funds. It probably depends on generosity but would be curious about a range for medium-sized (1B-5B) funds?
60-80% range in my exp
I am thinking of joining an SM out of college, I was wondering if I can PM u?
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