I’m interviewing to be the first hire at a Commodity hedge fund and was curious kind of comp I should be trying to get
-the PM is working alone currently but plans to hire 2-3 people as the fund grows. 5y track record and decent returns so far
-150mm AUM
-PM has bank background and fund was seeded by a large macro fund
-I have 7 years exp trading macro at a commodity trading house and then 1y at a quant prop trading firm
What kind of comp structure should I be asking for? Obviously high risk/high reward to take this offer and would like some kind of equity/exposure to growing aum, but not sure what’s a reasonable amount to ask for
Based on the most helpful WSO content, compensation in hedge funds can vary greatly depending on the size of the fund, the fund's performance, and your role within the fund. Given that this is a relatively small fund with $150mm AUM and you would be one of the first hires, you could potentially negotiate for a higher base salary and a significant portion of the performance fee.
In terms of structure, hedge fund compensation often consists of a base salary and a performance bonus. The bonus can be a significant portion of your compensation and is typically tied to the fund's performance.
Given your experience and the risk associated with joining a new fund, you could potentially negotiate for equity or a share in the fund's profits. This would give you exposure to the fund's growing AUM and align your interests with those of the fund.
However, it's important to note that these are just general guidelines and the specifics can vary greatly. It might be beneficial to consult with a compensation expert or someone with experience in hedge fund compensation to get a better idea of what you should be asking for.
Sources:
What are targeted returns and AUM?
at $150M i would want a big piece of that upside because you wont make much until (if/when) it doesnt scale. Would want something that works out to at least 10% of bonus pool as the first hire.
So average return has been 8.5% with a 1.3 sharpe. The vol target is 10% although has been closer to 6 in practice.
I definitely want some kind of carry and was thinking 10bps if the management fee (150k) and 10% of the performance fee sounds reasonable to ask for, I just wasn’t sure if this is common in practice
Base salary + GP profit share minimum + discretionary performance bonus was how my first firm structured similar contracts for the first investment hires.
GP profit share minimum => some share of gross profit of the management company after base salaries, admin costs, etc. So for 2% on 150mm AUM, you have 3mm of GP revenue. If you make 10% return that GP revenue is now 6mm (20% fee). Fund admin/base salaries/legal cost of ~2mm is now subtracted out and you are left with a bonus pool of 4mm for the company. You agree to some contractual minimum %age. Something in mid single digits makes sense for the first investment hire.
Adding to this - the math says it's very hard to make any money unless you can scale.
For ex, assuming you have a really good 10% year one and you agreed to 5% GP stake (and my cost assumptions hold true). 150mm fund => 6mm in GP revenue. 2mm in GP costs = 4mm residual. You keep $150k base + $200k profit share + maybe $200k performance bonus (assuming PM likes you, other people aren't expensive, PM doesn't have to pay himself). In a downside year you likely get nothing and perhaps the firm shuts down.
Comparatively, you're hired as a first analyst at a pod at a mega platform. First year guaranteed $750k. If you're relatively senior you agree to a PnL split with boss (say 10%). Team has $500mm AUM and makes 10% net = 50mm PL. Bonus pool of $10mm and your boss pays you $1mm. If you blow up you are a known commodity and likely have another role within months.
To go the small fund route you really need to believe in the manager's ability to scale and that GP stake to be worth something.
This is great advice and seems about right. I have been down this path - and I know others as well. I did not look at the above poster's comments before I formulated my guess at a fair market price and I would have estimated that a fair offer would be something like $150k base and 5-7.5% profit share. One additional element to add would be that even though this profit share might seem low, the PM is going to have to give out profit share type deals to a lot of other people if it scales and does well - a CFO / COO / Compliance hire, a risk management hire, and maybe 1-2 additional investment professionals as well. He/she will be somewhat limited on how much they can offer you in profit share because they will have to make sure they still end up with ~70% profit share after allocating out all the potential profit share for additional new hires if it scales well.
FWIW - I have seen this pan out in a variety of different ways. It can go sideways quickly and people bail out to platforms / multi-strats / et al... It can also go well for awhile and you can make a ton quickly, but then it blows up and you can probably get a stand-alone PM job at a different fund. Or it can obviously go well and you are in a great seat! Of the people who I have seen pursue this path (number 1 or 2 investment hire with similar structure), 5-10 years later on for all... 2 are stand-alone PMs at different firms, 1 is still at current firm in a great set, 1 is head of execution at a different firm, and 1 is a Sub-PM with a large allocation under very senior PM at a different firm. So it mostly tends to work out for people who are talented (which is why you would get hired for a situation like this in the first place).
Like all jobs in HF land, the big question is what is your risk tolerance? Are you single? Do you have a wife / partner who earns quite a bit? Do you have wealthy family to fall back on? Do you have kids and a mortgage? And so on, and so on.
PM me if you have more detailed questions.
Edit: Adding one more note or two - I just wanted to mention how the fact that this has already been seeded / launched and has some degree of track record is a relatively large de-risking factor in your favor vs. a pre-launch. Additionally, in terms of asset class specific spaces, I think a lot of shops got overly eager to expand into commodities after 2022 and it has been a very mixed bag so far in 2023 so it might be a good path to take a swing at a less political environment like the one you described.
Your outcome sample reflects mine as well. Out of 8 people, all who made this leap late 20s/early 30s to try various smaller funds:
Notably, only 1 stayed at the initial launch but I'm a firm believer that launching a fund is a huge value add to your career. Taking risk on the buyside is a valued experience and pays dividends later on.
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