Why Do Single Managers Not Have Formulaic Pay on P&L?
Why is this just a MM thing? Doesn’t make sense to me - no other way to align the interests of everyone in the firm imo
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No pass through
Thanks for the response - could you elaborate?
The formulaic payout MM gives is charged directly to the LPs with pass through. SMs have to pay everything out of their 2 and 20 (realistically more like 1.5 and 20 nowadays). A big reason for the talent outflow from SM to MM is because a lot of SMs are still under their HWM despite a big year (i.e. no carry for the firm), so even if the analyst had a big year, the PM could not pay up unless he is willing to take a pay cut from his share of the management fee. Ilana Weinstein explained it more in depth in her many interviews. She obviously is biased given she is a HH but still great insights.
Strong disagree - sure MMs have a pass through, but also headcount/AUM is much higher - the money is there at SMs. The structure of SMs with less junior discretion and lots of non-alpha PNL makes attribution messier
Doesn't matter how much money SMs have.. if the fund is down (which many SMs have been recently) and some analysts are up there isn't money to pay them.. that's why it doesn't work. At MMs the investors pay the PMs that are up even if the fund is down. Hence the reason why the answer is pass thru fees
? Formulaic payout is common practice after an analyst has been there for 2-3 years. Usually allocated some percentage of fund’s incentive fees, or as % of your positions
Yeah maybe 1%
This is accurate, though that formula may be something like a fixed percentage of the performance fees + some scoring / discretionary jump-ball component. Which has issues of its own, but is still performance linked.
Not just about pass-through frankly.
If in a SM the tech analyst pitches long a stock and the stock then gets cut in half but the PM had passed on the idea, should the analyst not be held accountable for that?
How about if the analyst pounds the table on something thay works amazingly, but the PM only bought a small position?
And how about the PM puts on a loss-making position in a tech name that the analyst never pitched?
IMHO at an SM a formula isn't that fair (upside or downside) because the ultimate decision-maker is the PM, not the analyst. If the PM is an honest guy, there's a good argument a discretionary bonus will better reflect an analyst's performance than a straight formulaic payout.
This makes a lot of sense - thanks. As an analyst in a pod this is pretty much the same though, right? Theres still a PM who is the ultimate decision maker
For a junior analyst, you have the same problem at a MM. But for more senior analysts, some MMs allow them to run either their own smaller pool of capital, or a paper-trading account ("alpha tracker") that makes attribution much easier.
Also at MMs the boundaries of what the coverage universe is for each analyst are better-defined than at most SMs.
It’s not as clean, but can be done fairly well and seems to be adopted increasingly
The reasons it’s less clean is that attribution is fuzzier, unless people are running sleeves. The more discretion analysts have the more accurate, but I think it’s hard on the long side given concentration and the importance of timing/sizing decisions that tend to have less delegation that the short side (due to generally much smaller/higher-turnover positions for shorts). Also because they’re not factor neutral, there can be ALOT of sector/factor PnL that really doesn’t deserve the same cut as idiosyncratic stock selection. Since MMs charge fees on idio alpha, and analysts are mostly neutralized you don’t accidentally pay people for taking exogenous gambles.
As others have noted, it can be done (and often is). It is different than MM (for some of the reasons mentioned) but that doesn’t mean it isn’t “formulaic”.
Usually simple: as you are senior it is a % of the performance fee the fund collects. Then you can adjust if you want to based on individual recommendations/book, I.e., some sort of multiplier or similar if your picks were above average etc. But the % of fees is widely used.
What ranges have you heard? My effective % is maybe 1-2%. Just amounts to $1-3m depending on incentive portion, with basically zero upside
You mean zero upside based on your personal performance/recommendations? Obviously unlimited upside based on fund performance.
% really depends, I find that firms tend to target a $ amount for a person and back into it. Take a very large fund (with large number of IPs) as an example ($40bln) you make 10% ($4) take 20% fees ($800mln) and so 2% is $16mm. Pretty high if you ask me. $1-3 seems right for a relatively senior person.
Consider solely from an LP view.
When I invest in a SM, I am investing in one person and their vision/style. I do not care about the rest of the team, that is how they manage their team. When invited to a conference that is the person I want to see speak and share their view.
When I invest in a MM, I am investing in a business whos’ main skill is evaluating, managing and allocating capital to the best PMs they can find. I am more concerned about their process, pass-through costs, IT than just if one PM gets up and leaves.
Have seen SMs pay formula based but do not think any SM would ever allow LPs to see that math. So its more of a handshake agreement.
Aside from the aforementioned issues with idea attribution, pass-through model, etc. the reason why SMs don't tend to have formulaic payout % is that it makes it easier to underpay people. Most of the time, by choosing to work at a SM vs a MM, you're trading off compensation for stability. The founders are not stupid and understand this as well, so they pay people accordingly.
Some do for Analysts, also depending on overall funds performance. Problem is more that most SMs don’t grow AuM anymore and pods have poached most good PMs by now.
They do for experienced guys, often not black on white contractually though.
The more sophisticated SMs have attribution systems in place, like getting tagged on trades. my roommate is at a place that give 2-3% to their senior analyst depending on tenure, MSD% for sector heads of the total p&L.
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