Portfolio Managers: Fair share of P&L?
I am having a hard time assessing fair market value on my current situation, given not many people are in these roles and every situation is unique. I received mixed advice after talking to my network. Any information would be greatly appreciated. Here is my background:
- I work at a SM that has been experimenting with some PM roles for individuals that want a direct cut of the P&L they are generating, and currently receive a formulaic payout.
- I have 6 years of buy side experience, with 4+ years at my current firm, and 2.5 with a direct link to P&L. I have always been a top performer.
- The last two years have been favorable for my strategy, and I generated in the mid to high 8 figures in P&L. I am up a similar amount YTD.
- The resources I am currently getting are good but not differentiated. At our firm I feel entirely responsible for the P&L, and have high confidence I can run this out of any decent firm with standard data and sell side access.
- My current total compensation lands between 4-6% of P&L generated. The caveat is I have a high guaranteed compensation relative to most PMs (~600k) and assess my risk of being fired on a down year as low relative to industry (< 30%, but I could be over optimistic here).
- My strategy is in a crowded area, and believe that what I am trading is correlated to strategies that most multi-managers already have.
My question is: is my compensation off by a lot and should I be earning 2-3x as much, or is it generally in the right range / am I lucky to be in my current position?
Any material information would be invaluable, obviously SBs to go around and happy to be otherwise helpful however else I can be.
You are around market - but it is difficult to tell without knowing your strategy and sharpe. It sounds like you have more flexible drawdowns than what a pod would give you; it is unclear if you are doing so on a neutral basis. If you are getting 4 - 6% without a significant amount of risk overlay (e.g. you can take beta and get paid for it) it is a good seat.
Generically I would expect to be given 10 - 15% of book profits at a pod shop like Mil. Places like Cit with tougher risk can move higher than 10 - 15% but the risk infrastructure is significantly more advanced and you have to work for that P/L. I heard rumours that places like Element were willing to cut 25 - 35% of profits to star managers, but they are extremely picky and the external group there is known to be a tough place.
This is what I think is market based on my industry conversations; but do not work at a pod and am a fixed income guy. If your product is equities, someone might have a better read than me.
I'm confused... Element gives 25-35% of profit? Is that 25-35% of the performance`fee? or raw pnl?
That doesnt make sense though they would be giving all or even more than their performance fee. Unless they are just happy to collect the management fee?
+SB. Equity market neutral, no beta / sector / factor, probably could run risk here if I wanted to but any material risk would hurt my sharpe. Going to avoid sharing more for anonymity reasons.
Generally speaking, the way to think about it is this:
1) The more personal risk you have, the more you get paid for it. The more stability a firm provides you, the less % of total PNL you’re likely to get. So pod shops pay higher %s but the probability is that you get fired within a few years.
2) The more truly idiosyncratic and non-systematic tie PNL is, the more you get paid for it. Meaning if you generate $80-100mm in a factor neutral, beta neutral world, you’re going to get paid more than generating it in the way you describe. Those are the facts - primarily because of the way various businesses are set up.
3) Everyone in management thinks about next best alternatives and your ability to trade away. Think about how much money you’re making in $ terms. You may think you deserve 2x that, but my suspicion is that management is willing to bet you can’t find a seat that pays you $1Xmm because those seats don’t really exist. Or if you somehow manage to find them, they come with a very different set of personal risk (I.e., make that much one year but be at risk of being fired the next).
if you have 6 YOE and are taking in the kind of comp you describe, you’d be an idiot to rock the boat.
open excel - put your current after tax net worth in A1. Put 75% of your average AT comp in a2. Put X number of years in A3 and Y growth rate in A4. Then do a FV call in a5.
You’ll realize that your only goal should be not to screw this up.
+SB, helpful, consistent with views of other posters I am likely getting between fair and generous comp relative to risk.
Don't necessarily agree with you that it is a bad idea to take more risk (especially if this continues for a few more years), but everyone has different risk preferences.
I never said you shouldn’t take more risk. But get a real personal balance sheet in your current gig and then risk tolerance changes a lot.
Question for all of you.. if the fund is charging 20% carry and giving payouts like this, how do they swing it to make that math work?
Pods pay a 3-4x higher payout before fees.
But as above comments mention:
1) you won’t generate nearly as much from beta/factors
2) depending on the platform 1-2 down years and you’re out
3) you will need to pay your analysts and so that needs to be accounted for (rule of thumb is PMs take 50-70% of pool)
So the variables to consider are:
1) how much of your p&l actually comes from alpha vs. beta/factors
2) how big will your equivalent book be at a platform
3) how much will you rely on juniors/analysts
4) how volatile is your strategy
Helpful breakdown of the variables, thank you, +SB
"The caveat is I have a high guaranteed compensation relative to most PMs (~600k) and assess my risk of being fired on a down year as low relative to industry ( 30%, but I could be over optimistic here). "
Sort of stopped reading after this, you are being compensated fairly and till you get rid of this idea you would not totally fit in a pod shop. While you can negotiate a guarantee when you join them that will only be for 1 year usually.
Also, one part I disagree with is the differentiation of risk at your current gig and pod setup. My guess based on your #s and post, you are not someone who needs large drawdowns or cannot work in the lines of the handcuffs of risk. My guess is your strategies are more of a grind daily on as the year goes by and add. Aka I think you use 40-70% of your risk allocation most of the time. Could be wrong...
The number of times I’ve heard a variant of:
Biz dev: how much p&l did you put up last year?.. and what did you get paid?… oh, we’ll if you worked here, you’d have been paid 2-3x that.
Pm: oh wow, sounds great. I could make $1X million. 3x my current comp. I could buy a bigger house. And a vacation home. And more.
And then PM eventually realizes that with all the additional risk parameters, would be lucky to put up 20-25% of PNL, even if the payout is 2-3x.
Also realize that 75%+ of their past P&L is beta and factors 😰
Very good points as usual, this is why recently when I spoke to some of the larger MM was not appealing truly at all. They are growing and paying up for talent but unless having a real tough year outside of them paying up the appeal is not that great.
Thanks, + SB. Not married to the idea of high guaranteed comp, it is just how the firm is structured.
You are right don't need large drawdown room, more worried about the risk framework. I work hard not to run risk on any of the obvious exposures (value, size, momentum, vol, quality, etc) but without access to their risk model hard to assess how much of the alpha it would explain.
Id alias nemo quam id. Aliquam qui reprehenderit commodi perferendis eveniet ipsa accusamus. Velit iusto dolorem quidem rerum enim aliquam necessitatibus magni. Praesentium nobis consequuntur modi ipsum consectetur doloremque ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...