How is PnL calculated for purposes of determining a portfolio manager's bonus?
So I know that portfolio managers and their pod/team typically get a bonus between 15-20% of PnL, but how is this calculated?
Is PnL simply the gross return of the pod/team times the hedge fund's performance fee or is the management fee also taken out of the return before calculating the perfomance fee?
For example, Let's say a portfolio manager was managing 100MM in assets and generated a 15% return, the hedge fund charge a 2% management and 20% performance fee with no hurdle, and the manager gets a bonus of 15% PnL (ignore base salary for the sake of convenience).
What would the calculation be:
A) 100MM*.15*.2= 3MM performance fee for the hedge fund and 3MM*.15=450,000 bonus for the portfolio manager.
or
B) 100MM*(.15-.02)*.2=2.6 MM performance fee and 2.6MM *.15 =390,000 bonus. (The 2% netted out of the .15 return is for the management fee.)
In your example, the pod made 15m profit.
15% of 15m is 2.25m, and that’s the payout. There can be some nuances around certain costs, but for the most part it’s that simple.
Are you sure that the 15% is of the total profit generated and not of the performance fee collected for the hedge fund? So if the hedge fund collects 20% of profits in total 15% would go to the portfolio manager and team and only 5% would go to the owners of the hedge fund? That seems really high.
Yes. The major multi managers have pass-through structures, which you can read about here or google. The pod bonuses gets paid before any management/performance fees, which are then on top of those. To simplify your 1 pod example, the team makes 15m, gets paid 2.25m, then investors pay performance fees on the 12.75m pnl. It also takes care of netting risk - if another pod loses 2m it doesn’t affect your pod’s payout - investors just pay fees on 10.75m net profit. There is some differences about what other costs are passed through and how the fees on net profit are structured but that’s the simple version.
At funds without this structure, the team payout is never formulaic and for the most part much less than 15-20%.
So if a fund had a 2 and 20 fee structure and paid 15% of pnl to PMs, the PM would get 2.25 MM, the fund would collect a 2.55MM performance fee (20% of 12.75MM) and a 2MM management fee? Then the investors would only get 8.2MM (15MM gross return minus the total 6.8MM in fees)
That’s basically correct - though performance fee would be taken after the management fee. Although what you tend to see is that funds with pass through expenses will usually have a smaller than 2% (or even no additional) management fee, since many of the costs of “keeping the lights on” are already covered as part of the pass through.
Is the pod bonus based on returns before or after leverage?
2/20% fees structure is for SM. There is an investment company that "bills" the fund with these fees. Then the investment company, with these fees, can pay PMs and other employees. If the fund is down, no perf fees and u will not be paid in full even if u individually had a good year.
For MM with pods there is only one structure. PMs and employees are directly paid from the investor money. Investors have to pay you base on ur indiv perf and ur contract, no matter the performance of the overall fund.
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