Hey all, I'm wondering how hedge funds pay out carry to analysts/PMs. Is it usually just paid out as a straight cash bonus, or do they typically require you to invest in the fund so you get paid out slowly over a few years, or do they give you an option between these? Understand that it might differ between seniority, so I would appreciate any insight here. Thanks!
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"Carry" is more of a PE thing. Bonuses don't have the same level of deferment for principals since all positions are marked-to-market. Only very senior leadership would get something analogous to "carry" in the HF world (a payout to the partners which comes from the fund's incentive fee). PMs get paid bonuses proportional to their performance (usually something like 10-30% depending on the fund), and this is usually either W2 income at most large pods or in smaller funds you can incorporate yourself to declare it as pass-thru LLC income. For something on the low end of payouts (10-15%) the bonuses would simply be paid in cash around the end of January. For the higher end (20-30%), you would get roughly half your bonus in January like before, and the other half in another year. Your deferred would be zeroed out if you lost too much money before it was to be paid out.
Mine is I get 50% in cash immediately with next paycheck, then 25% that's invested in the fund for year 1 then paid out, then remaining 25% invested in the fund for years 1 and 2, then paid out.
So for $100 bonus, assuming 10% return in year 1 and 10% return in year 2:
$50 year 0
$27.5 year 1
$30.25 year 2
If you were to leave in Y1 would you still get the payout at end of Y1 + Y2? Or is there a clawback concept?
There are different bonus structures depending on seniority and firm:
1) % of pnl: standard for PMs at pod shops. Generally paid over 1-3 years, in cash. I would say for senior roles more along the 2 years
2) % of fund fees: more of a SM structure. Similar to above, but for overall fees. Usually cash and some deferred (50/50 type structure). The deferred is usually invested in the fund
3) actual equity in the fund: receive payouts every year on actual ownership in the fund. This exposes the equity holder to all revenues (fixed and performance fees) and also costs (like you would anywhere else, you take a percentage of overall profits).
I’ve seen all 3, the last one for more senior people.
The general rule is, if you refer to HF comp as "carry", there's a near zero chance you will get a % payout and you will more likely just get a discretionary bonus.
Okay
I call it “carry” and I have equity in the GP. I just call it that because it’s easier and more to the plain meaning in our world.
Normal people would call that a dividend, but do as you wish.
Assuming this is an incentive to stay? What if you leave or are fired, but you have money invested in the fund?
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