Are Single Managers More Profitable/Pay Higher?

I am a prospect in the industry so forgive my ignorance. I see funds like Lone Pine with 100M AUM/head, Viking with 200M AUM/head, or Matrix Capital with almost 300M AUM/head. Compare this with any MM like Millennium which has 5000 employees for 60B AUM or P72 with 30B AUM for 2k employees. It seems that single managers are just so much leaner and even if they make no money for their clients, just the 2% of capital they take would outearn any of the multi-managers.


Therefore, how does multi managers compete in pay when there are so many more people they need to pay?


It seems like multi managers would need to charge fees of 5x to match the same revenue/head which shouldn't be possible?

 

Ah, you've got a keen eye for numbers! It's a common question and I'm glad you asked. Let's break it down:

Single Manager Pros: - More job stability - Potentially greater salary - Longer-term investment time horizon (depends on the firm's/PM's investment style) - Better work/life balance (again, depends on the firm) - Less stress in general

Single Manager Cons: - Less access to sell-side research - Less pay during good years - No brand name

Multi-Manager Pros: - Amazing access to research, management teams, and conferences - Well-known brand name firm - High payouts during good years - Develop good relationships with execs/IR at companies

Now, to your question about profitability and pay. It's not as straightforward as comparing AUM per head. Each type of fund has its own business model and compensation structure. For example, multi-managers often have a high base salary and a performance-based bonus, which can lead to very high payouts in good years. On the other hand, single managers might have a more stable, but potentially lower, income.

In terms of profitability, it's not just about the fees they charge, but also about the returns they generate for their investors. A multi-manager might charge higher fees because they offer a diversified portfolio and access to top-tier managers.

So, while it might seem like single managers are leaner and more profitable, it's not always the case. It really depends on the specific firm, their investment strategy, and market conditions.

Remember, the grass isn't always greener on the other side. It's about finding the right fit for you, whether that's at a single manager or a multi-manager.

Sources: Single vs. multi-managers, How Does Citadel HF Make $28bn Revenue with $55bn AUM? Multi Manager Economics, Citadel vs. Millennium vs. Point72 vs. Other Multi-Managers

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

You’re looking at AUM/head completely wrong. You only care about AUM/investment professionals. 

worth noting that p72 and MLP use a lot of leverage too. Comp also doesn’t work how you’re thinking, pods at MMs are given their own AUM and paid exclusively out of that so you are interested in the AUM/head at the pod you work for and your PMs ability to make money.

 

mmhf have different fee structures. They have a pass through feature with LPs so they expense all the ludicrous comp packages directly to the LPs. Can read more in the part 2 brochure of their advs  

 

MMs are a better product for LPs than SMs and they also invest in their moats. For both reasons, they charge effectively far higher fees than SMs by passing through certain expenses as fees to their LPs. SMs do not make meaningful investments in moats and are a worse product for LPs, so they do not have power to raise prices or try stuff like this generally. 

Because of this dynamic, the pattern that I've seen is that MMs (especially outside of L/S equity and in more quant-y strategies) have the incentive to pay junior people much more than SMs. The pay packages I've heard my friends get at MMs are often actually pretty insane. But it's really because it's "free" from the standpoint of the MM. This is really only outside of fundamental long/short that I've heard of this phenomenon. 

 

Maybe not on average but there are long fat tails to the upside for macro comp. Many strategies have a capacity limit, but macro has virtually unlimited capacity. You can literally sweep 500 spoos in a single clip ($125m), so completely realistic to be able to bet billions in a very short period of time. So yea, macro definitely has far greater upside pnl potential.

 

Moats for MMs

  • For quant strategies: tech infrastructure. 
  • For fundamental strategies: risk, hedging and execution. (Empirically, others haven't produced something similar to Citadel's fundamental equities businesses in this respect, for example.)  
  • For both, return diversification. Diversification is the only "free lunch" in finance. There's certain strategies that are awkward to sell as a standalone product but do well when combined together. This makes product more compelling for LPs.
  • For both, better ability for LPs to cut losing PMs. If you invest in a single manager, you typically can't withdraw immediately on a drawdown. But MMs can do this with PMs even though LPs can do it at the fund level with MMs. SMs rarely voluntarily give up money back to LPs when they are not doing well. This gives LPs kind of like a put option on managers (though the MM decides at the fund level when to exercise the put not the LP).
 

There's a lot of trade-offs here.

First off no matter where you work, as a PM you're only going to be paid on alpha generated. At these SM net long stock funds, the returns from beta go straight to the management company. See this for a discussion (https://www.wallstreetoasis.com/forum/hedge-fund/the-smtiger-cub-model-…)

Second if you're a pure analyst (no PnL ownership) then you're often better off working for an SM. MMHF analysts have neither job stability nor much upside. For these mega SM funds, analyst compensation is a rounding error in the budget since you're not paid a percentage of revenue, and they'll chuck a couple hundred k at you even in a really bad year to stop you from quitting. Which brings me to point #3

People work at MMHF as analysts for two reasons. First there's way more seats available. Second, because the pod sizes are so small, you're forced to learn a lot and understand how the whole sausage is made in the factory. There's a good chance that a good senior analyst is going to get a sleeve at some point if he asks for it, and there's a natural transition to full PM at a later point in your career (probably you'll have to switch firms but who cares besides citadel the MMHFs are largely just clones of each other). There's almost no more internal promotions from analyst to PM at a lot of these tiger club SMs (especially now with declining AUM). If you simply normalize by the # of seats available per year, your most likely path to PM is thru the MMHF structure.

 

more willingness to invest in technology and infrastructure. Most other platforms pay the front office well and the middle/back office rather stingily. ken spends big on the mo/bo and the quality of support really shows. I've worked with ex-citadel employees before at various mmhfs and they can solve your IT problem in hours whereas other employees might just dick around for days with no progress because they just don't get paid enough to give a shit. For example, one time our VAR numbers printed 0 for days because the reports were run off someone's work laptop which restarted over a holiday (huge IT red flag btw), and no one in management even noticed. Turns out the head of FICC doesn't trust the MO's VAR numbers and just decided to use # of lots as his risk metric instead; he was never reading those reports in the first place. If Ken was in charge, every single person in that report chain would have been fired within 24 hours.

 

They myth of AUM/head at SM vs MM has to stop. The fee structures are completely different. MM charge a pass through fee whereas SM are max 2+20 (in practice I think most SM are closer to 1.75 + 17.5). So hypothetically on a 10bn fund assuming 15% returns (bear with me as I'm calculating both fees on the total AUM which isn't completely correct but point still stands)

  1. SM will generate $200m management + $300m performance = $500m total fees
  2. MM will generate $1bn management + $300m performance = $1.3bn total fees (assuming a 10% pass through)

The MM is generating of >2x the amount of fees at the same AUM which is how they sustain more employees

 

Guess its wot happens when u generate double-digit uncorrelated return every year

 

I think best way to explain the pay differences (profitability can be extremely nuanced) is that at the pod level, MMs are just a straightforward formulaic payout to their teams as a function of their PnL. I don't know truly how the economics work for the GP/LP but I'll give you an example:

Say a pod generates a 3% return on the year, net (I think) on a $1bn of GMV. That's $30m in PnL, most equity pods I believe pay out something like 15-20% of those profits to the team, essentially as the bonus pool. Likely means the pod is hanging on to the rest. If you have 5 members of the team including the PM, that means you've got ~$5m to pay out to 5 guys. PM will probably take > 50% of that, and then distribute the rest accordingly... so the investment team of 4 is splitting the remaining ~$2 - 2.5m for bonuses. Most books at pods probably average somewhere closer to ~$2bn in GMV, largest being > $3bn, smaller being closer to ~$750m perhaps. 

For SMs, the AUM/head is not really a good indicator of comp unless all investment team members are invested in the GP, which would mean they're partners in the fund and have a stake in the management company which grants them access to the pay stream on mgmt fees. MOST SMs that I know of I THINK do "points" or essentially a % stake in the performance incentive comp, so the SM is structured basically the same way and makes 15-20% on the PnL, the rest going back to their investors. The reason folks struggle with SM comp is because it's entirely up to the PM who runs the place to determine who gets paid what, and the lines can blur a bit more when it's all less formulaic. If you're a sector head/senior analyst at a $1bn SM that had a 20% return year, that same performance at a pod would yield a bonus pool of $30m to which you might get a ~$5m+ bonus. But not all that performance may be pure alpha and perhaps the PM ran net a little higher that year, so ultimately he was responsible for driving a larger part of that 20% return, so he decides he gets 80% of that bonus pool $ and so the investment team is left with $6m to split. Still plenty, but the economics are more top-heavy, and to be frank rightfully so if the net is > 0% (+/- 5%).

You also have to remember at the SM level, the management fees are largely there to help fund base salaries, rent, travel expenses, Bloomberg/IT, etc. So in reality the only benefit to the SM is if the fund's AUM scales dramatically and you have partnership interest in the GP. The comp structure across both SM and MM are LARGELY driven by the law of large numbers. An SM with $5bn and 10 investment professionals returning 10% a year is going to have a $75m bonus pool for 10 people, give or take, beyond if any of those members get the dividend of remaining management fees net of expenses (let's say it's 1.5% of $5bn, at something like a 50% margin which is probably WAY too low for a hedge fund but being conservative... that's an additional ~$37.5m remaining after expenses in management fees to go around). Most SMs don't have that incredible of economics of course.

The last thing to note is that most of the SMs listed in the OP are well below their HWM still so they aren't earning any performance incentive $ (yet). So in reality the bonus pool likely gets paid out of the mgmt fees for the time being to keep folks around. The same way that if a pod/MM book is flat/down on the year and isn't being fired, they can probably borrow against their firm & future bonus pools to pay out analysts in a bad year.

 
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I found the premise of the question to be funny, because the industry trend has been the opposite over the last few years, MMs have been winning by paying their (top) talent a lot more. I've lived in both worlds and can tell you what is missing from your comp calculation: 

  • PM compensation is passed on to clients, so MM fees are indeed a lot higher. Including PM payouts major pod shops end up averaging around a 5% management fee and 30% performance, which comes out to something like 10% of assets. Top SMs average more like 5% of assets, and assuming a 2% cost structure, the net earnings look more like 8% vs 3%.  
  • The compensation is heavily skewed towards the founder + a few partners in a SM. Because talent doesn't have contractual ownership of P&L senior leadership always takes more credit for the wins (and assigns more blame for the losses). Successful talent at a MM also has a much easier time switching roles if they are unhappy with their deal vs. star IPs at a SM face more frictions to trading up (usually will be taking a short term pay cut if switching between SMs), and that obviously impacts founder vs. other IP splits.   
  • Not talked about enough at all, but fewer IPs / AUM at a lower fee structure means SM employees have to produce considerably more alpha (or risk) with way fewer resources. Take your $300M/head example at Matrix. For a fund running 15% vol, before netting the average IP would have to produce > 20% volatility or over $60M in annual vol. In a zero sum market that gets harder as you scale up, who are they competing against? A fairly senior PM at a platform (usually 10+ years of experience) is producing that amount of risk, and is generating $60m-$120m in P&L per year. They are getting paid $10-20M/year to do so with a full analyst team under and the data, resources, and access of a major institution. Meanwhile a "senior analyst" at a SM who is making $1-3mm is effectively getting asked to produce the same amount of risk, with maybe 1-2 juniors under and subpar resources relative to a much larger platform. 
    • While not as clear cut, bonuses at a SM will still be a function of performance, so difficulty of performing well ends up being an important part of the comp equation. Yes some of the fat from the management fee margin will be passed down to retain talent, but that is heavily capped on the upside. 

By maintaining lean organizations most SM founders have been operating with a high discount rate (by choice or because they have to), investing less in talent and infrastructure while retaining profit distributions in the short run. MMs have been doing the opposite, and it looks like it has been massively paying off for them in terms of winning the long game. 

 

Thanks this was great. Just so I understand the PM payout calc properly, the typical relatively experienced pm (3+ years as a pm) at millennium/citadel runs a 1.5-2.5bn book, and can do 3-6%, and then gets 20% payout to split between him + his team = $10-20m bonus?

Or is the payout a little lower? How often do PMs there do HSD or LDD % on GMV? Upside seems amazing

 

Risk and sharpe ratio is the generalized way to think about this, not GMV and % return. A highly diversified quant strategy with 3k+ positions will use way more GMV to produce risk (and generating a HSD/LDD return is basically impossible) vs a directional macro strategy will use much less "GMV" / the term GMV doesn't even make sense. 

Those managing > $50M annual risk at the platforms are generally experienced / senior PMs who have been around the block. The expectation is to produce a sharpe ratio in the range of 1-2, which translates to $50-100m in annual P&L. Payouts generally range from 10-20% (though I have seen as high as 30%) and really depends on length of track, experience level, and most importantly the supply & demand dynamics for talent in that strategy. So on a 2 sharpe year for a hot / in demand strategy, a senior PM managing $50m in risk would pull in >$20m. The very largest platform PMs in the industry are managing >$1b of annual risk, so you can see how much the economics can scale. 

Of course, most people who try to become senior PMs don’t have any alpha, perform < 1 sharpe and get booted pretty quick. IMO if your talent is in producing alpha, becoming a PM at a MM is by far the best place to be. In contrast a SM is halfway between a MM and a PE shop, where (in addition to an investment role), managing client relationships, playing politics, & sucking up to the founder can get you paid extremely well with much lower risk (often at the expense of alpha producers in the organization).   

 

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