Hedge Fund Compensation Breakdown
I wanted to gain a little more insight into the compensation breakdown in Hedge Funds. Let's say, for example, we have a SM L/S Fundamental Equity Fund with $200m AUM, charging 2/20, with 4 investment analysts, 1 Founder/PM/CIO, 1 trader and 1 COO.
If said Fund returned 20% on the $200m, it would net $8m in performance fees. I am curious as to the approximate breakdown of this among the employees in general (I am aware this varies on a fund-by-fund basis). I assume that approx. 50% would go to the Founder/CIO/PM, the trader, and the COO. While the other 50% would go to the 4 investment analysts. If this is correct, and 3 of the analysts have 5+ years experience, while the other analyst has 1 year experience, how would this 50% be divided amongst the investment analysts?
commenting to refresh this post
Founder would take closer to 70% in this situation I think, unless analysts are super senior and have been with him for years
Analysts really depend on alpha/ideas that performed. Flat rate for the three w/exp to make it easy. If any of these are true cofounders with the PM, you might be able to double their bonus, e.g I know a few COOs who are true cofounders and get paid f’ing bank at larger funds.
Bonuses:
Founder $5mm
COO $600k
Trader $350k
Analyst $650k
Analyst $650k
Analyst $650k
Jr Analyst $150k
Assuming bases are $150-250k for all.
Imo, this is pretty inline unless you have a dick founder or a very generous one.
take 20 - 30% off every number except founder, and add it to founder, and you'd be closer to reality
Highly doubt the payouts to the analysts are that high. 2% mgmt fees on $200M is $4M. Operating costs are usually pretty high, they're breakeven on mgmt fees at best.
Would imagine bonuses are 1/2 of what you described. Would think PM keeps 75-80% of that and 15% of that to the analysts, so 3-4% per analyst. And that's generous.
For example, know that analysts w/ roughly 5 years experience get $700k-800k at fund sizes of $1B-$2B w/ same performance. Really hard to imagine similar numbers at a $200M fund.
This is so wrong
There is a good chance a fund that small doesn't even get the full 2/20 - if there was any placement agent fees or deals with FAs for sourcing you can probably whack 25% off that 20% right out the gate.
It's highly likely that the fund is a partnership where the CIO is the main partner (shareholder) and you may have a few other partners (COO and head of marketing/sales). The partners will have a target dividend they want to receive and will limit the payout to all non-partners to protect their upside. Unless you have direct P&L linkage in a contract, you will get paid the bare minimum to keep you content. Notice I didn't say happy, just content, so that you can't be bothered to invest time looking for a new role. The only way to get paid in these shops is to become so good that the CIO invites you to join the partnership. Also, any prudent fund will retain earnings for a rainy day or to fund marketing to ramp up AUM. I would be shocked if the fund in question paid out 100% of the 8m.
What does PnL linkage actually refer to?I feel like I keep hearing different variations of this.Some people are saying that it means you get paid a percentage of the funds incentive fee and others say that it actually refers to the profits you yourself make for the fund
It can vary between funds but generally if you have P&L linkage you get paid based on the money that your ideas generated for the fund. So in the example above, if there was 8m of performance fees and your ideas generated 4m of that, your bonus would be "linked" to that 4m. No way you're getting 100% of that 4m, so you likely have some contract that says you get a % of that number. Now, where the politics comes into play is, you might say as an analyst that your ideas generated that 4m. Someone senior will come in and say "yeah, but it was my contact who knew someone on the Board who confirmed your thesis about margin improvements so technically it was also my idea too." So what happens is everyone tries to take credit for the best ideas and this is where things can get tricky.
Plus, as stated multiple times on here. In a 20% year, which basically is "a good but not great year". Very tough for the founder to only take 50% of total pool. 20% years are the ones where the juniors get screwed hardest cause there is not enough cheese to pass around and its full on bonus pool fights. "Good" years are ones you get shafted the most. The crazy years, enough cheese for everyone the crap years the senoir guys do not care and write it off just survive.
Think this analogy more applies to a 10% year, 20% gross and especially net, is without a doubt an above average year for a vast majority of funds
Yah you are probably right. Still in our example the jr guy getting pretty shafted towards 1x salary. Think this thread sums it up ha.
I'll caveat this by saying that I have no idea how things work at other funds, I have never worked at any of the Tiger cubs, etc.
But....at my $bn fund, junior and mid-level analysts are viewed as fixed costs. This means that we know at the beginning of the year how much we will pay them just like in banking, private equity, etc. It falls in into an expected range. Just like in banking and PE, there is some variability in that range depending on individual performance and how the fund does, but it's not directly tied to the fund's performance.
It's not until you become more senior when you are in a risk-taking seat where your comp will start to be directly correlated to the the fund's performance. For example, senior analysts at our fund have a % of the incentive fee. There is no theoretical limit as to how much they can make.
Instead of doing the math that you are doing, my advice would be to look around at what people in similar quality jobs at similar levels in finance make. That will probably get your closer to the right approximation.
Could you elaborate on the % of incentive fee? Is this the P&L bottom line in the form of equity or a % directly to the performance fee for the year?
Huge difference and want to confirm.
Not the person who wrote the original response but have contracts at this level.
I have seen both. Although the equity portion is usually for the most senior (I.e. partners) and cut outs of performance fees are for senior but usually one level below. The equity is more of an “in perpetuity” type thing (of course with transfer schedules as people leave, etc), so it is harder to change around (and fire people) - basically usually a lot more to work through if the person leaves. Additionally, equity is a payout across all profits, regardless of pure performance (although that’s where most of it comes from), in that you might still be profitable in a low return year (fixed fees, AUM growth, cost reductions, etc).
The % of performance fee is a way to align incentives without giving up any controlling stake in the firm and having it be more flexible to change going forward (and of course be specifically tied to performance).
Yes, % of the performance fee. I used the term interchangeably.
How can it have variability based on fund performance but not be tied directly to find performance? By tied directly do you mean is the only contributing factor?
Most common for founder/PM take in the 80-90% of alpha P&L range. Definitely not all analysts tend to have a % of P&L attribute linked to compensation. Those who do, at your structure, I would assume 2-4% each assuming everyone performed the same, but high performers can earn more depending on the fund (say high performer took 5-6% while others got 2-3%). Have seen leaner shops tho with 1-3 analyst & 1 PM paying c.8-15% to the high performer.
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