Let's a team of 1 PM and 1 Analyst make about $5m in PnL from their book, with a 15% cut for the team, which would leave $750k.
What expenses are typically deducted from this $750k? I would assume Bloomberg terminal costs, any tech or subscription costs etc. What about base salaries for the PM and Analyst? I have heard mixed things on salaries, with my PM telling me that salaries are also deducted before bonuses are paid.
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Expenses include salaries, sign-on bonuses, rent, bloomberg, utilities, news subscriptions, data fees, basically any charges incurred on your “business”.
Expenses are deducted from your trading revenue. Your 15% cut is from your pod’s business profits. So if your expenses are $1m, then your $5m in trading revenue becomes $4m, and your team’s collective bonus is 15% * $4m = $600k.
So if you made $200k in base and your analyst made $150k in base then you could give your analyst a $100k bonus for a $250k TC for the analyst and a $700k TC for you.
Many shops won’t take a chance on you unless you can pull in $10m+/year. You really have to go to a very small shop where they won’t give you a lot of capital.
Got it thank you, so salaries are deducted from pod PnL as opposed to from the bonus pool? Does this vary from firm to firm or are these more general terms that all firms / pods adhere to?
Taking your numbers distributable bonus is $600k, but from what I am being told distributable bonus in your example would be $750k - $200k - $150k = $350..
Well you should clarify with concrete examples with the hiring manager before you accept any offer. You gotta understand the full deal. Many firms will do it exactly as I stated above but there might be an oddball example of another firm doing something different.
The salaries in my example above were baked into the expenses, and do not need to be deducted again from the 15% cut. But then again, some other oddball firms might deduct salary at the end (ie your $750k -200k -150k = $400k to distribute in collective bonuses).
If you don’t mind me asking, what do you currently cover?
Asking before accepting the offer is no longer possible.. This is my first HF role so I was not entirely familiar with all the nuances related to PnL, and I quite clearly
I would rather not say what strategy, given that it is quite a small world, but it's not L/S
Well if this is your first job then you don’t need to be worried about these details, this would be the responsibility of the PM. If you have questions you can direct your questions to your PM but he’s probably going to tell you to fuck off and focus on helping to increase the PNL rather than worrying about what kind of funds will be available in the bonus pool.
You have top of line (TOL) and bottom of the line (BOL) expenses. TOL expenses are research subscriptions, bloomberg terminals, commissions, clearing costs, etc. BOL expenses are guarantees paid to new employees. At most MMHFs everyone's base salaries are TOL expenses, but not always (at my fund they are largely BOL expenses). The formula which explains everything:
(Total gross trading revenue - TOL expenses) * payout percentage - BOL expenses = bonus pool
Above posters incorrect - PM base salary always below the line. Top MM every other cost is above the line including analyst salaries. Mediocre MM will try to add a bunch of other costs below the line (e.g. analyst salaries, margin costs, data etc.) to reduce payouts.
Yes this is what I have been told. Analyst salary above the line and PM salary below the line.
I didn't expect any base salaries to be below the line, but thanks for clarifying and confirming.
huh thanks for clarifying. when i worked at a big mmhf as an analyst i was def above the line. most of the pms at my current firm (not including me) are below the line. I assumed the pms and analysts had the same calculation for base salaries looks like that is not the case.
Yeah to elaborate the first comment is incorrect. The expenses are why you aren't getting 100% of your PnL. Best way to think about it is that you are an outsourced hedge fund manager running your own fund but employed by your only LP, [insert large pod here]. You get to receive the incentive allocation the same way you would if you managed your own hedge fund for your own group of investors so the payout is meant to be similar to that.. 1.5% / 15% at an SM --> the 15% is equivalent to the 15% PnL you get at Citadel, the 1.5% at said SM goes towards paying expenses (rent / salaries / travel / Bloomberg / brokers). The pitch being you don't have to sort out any of that at the pods and can clip 15% of whatever you make and pay it to your team however you want.
Best way I've seen it described is as such: PM & analyst team get $500m, 2x levered = $1bn in GMV. They make 3% that year, or $30m. They get to keep $4.5m - MOST PM's will typically pay themselves upwards of 50% of this. For sake of simplicity that means $3m. The analyst in that scenario then gets a $1.5m bonus.
In other scenarios where the PM is flat/down then they typically have to borrow against the fund and future bonus pools to retain their talent... so if there's no PNL then they have to ask to say "hi can we have XYZ $ to pay my analyst net of whatever our PNL bonus pool is next year?" Either that or the PM has to pay out of pocket.
Anyone else feel free to correct me if I'm wrong on my math.
Try 4-6x leverage and return target a lot higher than 3%…at least for the top podshops.
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