5/31/10

hedge fund salary

Widely considered the creme de la creme of financial institutions, hedge funds are a source of fascination among investors and others alike. Individuals aspiring to make exorbitant amounts of money look up to top managers with dreams of one day running their own fund. Getting to that point is a topic for another thread - right now it's time to discuss hedge fund compensation.

The first thing to understand is that there are two driving factors that stand above all others in determining compensation: fund size and, more importantly, performance. This applies across the board. Fund size and performance affects both junior and senior employees, although there's less variation in compensation across firms at the junior level.

It's simple. The better that fund performs, the greater the returns. The greater the returns, the greater the bonuses. On the other hand, greater fund size is typically correlated to higher compensation. This is not always the case.

It's important to note that, with more assets under management, there are more people to pay and a far greater overhead. Here's @LTV on smaller funds vs. bigger funds.

To whoever said 500k+ happens only at big funds, you're wrong.

Big shops actually don't pay junior guys much at all (unless they're rock stars). Big funds have huge overhead and way too many people. Paulson, for example, is notorious for underpaying analysts.

Smaller shops (run by legit PMs, of course) run lean. For example, a good friend of mine is part of ~8 person / ~600m AUM shop run by a very good global macro guy. That's ~12 bucks in just management fees right there. The guy turned down a very large HF to go to there, and I certainly don't blame him.

This is not to say smaller shops are better. Big funds are a great place to start a career because of the exposure to multiple markets/assets/products/strategies you get. It allows you to find your groove, and then either become successful in that groove at the same fund or move to a smaller fund that specializes in just that.

Hedge Fund Compensation - Difference Between Base and Bonus

HF compensation is different from investment banks in that hedge fund bonuses are much more volatile. In investment banking, it's true that bonuses are determined by performance, but the variation in those bonuses isn't particularly significant.

In hedge funds, bonuses are determined by performance. Bonuses can be anywhere from nothing at all to any multiple of the base pay. To make an example, a portfolio manager at a fund with $1bn assets under management would expect a base around $250k with a bonus ranging from $500k to $3 million based on performance.

In hedge funds, bonuses are where the real money's at.

Hedge Fund Salary out of Undergraduate School?

First, getting hired by a hedge fund right out of undergrad is incredibly rare. They typically want two to three years of experience in their analysts. If you do get hired out of undergrad, there's a ton of variability in compensation depending on performance, culture, the manager, and much more. Typically, base compensation is anywhere from $60-80k with a 0-100% bonus.

Compensation out of undergrad also varies by role within the firm. @LTV sums it up nicely:

The fund I'm at, you're looking at first year salaries of around 60-100K, the higher end being the guys who have bonuses and do the trading and other finance-related activities. 60-75k for tech guys, and about the same range for back office.

Hedge Fund Analyst Salary

The typical hedge fund analyst has two to three years of work experience under their belt - typically in investment banking - which means they get paid a good deal more than a hedge fund analyst right out of undergrad. Here's @Simple As... on compensation for hedge fund analysts with around two to three years of work experience.

I won't discuss my compensation directly, but a junior analyst (~2 years out of undergrad) can probably safely expect somewhere between $100 - 150k base salary and a discretionary bonus of 0 - 100% of base depending on several factors, usually most important is the fund's / team's performance. A junior guy coming directly out of undergrad (very rare) can probably expect a base salary of $70 - 100k with a discretionary bonus of 0 - 100% of base.

Million Dollar Hedge Fund Compensation

There's always been a lot of fuss in the media about hedge fund salaries north of seven figures. What's the reality?

The fact of the matter is that, unless you're a portfolio manager, it's highly unlikely that you'll make seven figures at a hedge fund. Even if you're calling all the right shots, it's unlikely. Don't forget the bottom line of starting a hedge fund: to make money. If a hedge fund manager can afford to pay you less, they will. More on that from @Bondarb.

Never underestimate the cheapness of hedge fund managers. I work at a top macro fund and million dollar salaries are very, very rare for analysts even during years when the fund takes in hundreds of millions of dollars.

Bottom line is that people start hedge funds to get very rich, and they are going to keep as much as they possibly can without causing massive defections. The bigger the name of the fund, the more they can squeeze the analysts.

I have some stories that would curdle your stomach about analysts playing big roles in making huge sums of money for the firm and then either getting an insulting bonus or even getting pre-emptively fired, so they can't state their case for getting their fair share of the cash.

It's a very cut-throat world out there. Bottom line is that, to reliably make 7 figures at a hedge fund, you have to manage money, not just funnel ideas to PMs.

Analysts generally are considered interchangeable, and portfolio managers who know how to trade and manage risk are far more valuable and much rarer than analysts who can help generate trade ideas.

So the question remains: how do you reach the point where you're making that kind of money at a hedge fund? Here's some succinct insight on how that's done from @mrharveyspecter.

For PE/VC/HFs in general, the path to riches seems to be:

  1. Work at a big shop for a while
  2. Get to a point where you've picked up good experience and where you think you can do better
  3. Go somewhere else where you get more responsibility or strike out on your own
  4. Profit (or lose)
  5. Sounds to me like opportunities for advancement at your firm are limited. If you believe in yourself and your ability to invest, this seems like a good opportunity to test your mettle.

Hedge Fund of Fund Salary vs. Hedge Fund Salary

On the more junior levels, fund of fund salaries are comparable to hedge fund salaries. As the positions get more senior, differences in salaries get more and more pronounced. The reality is that hedge fund senior level workers make significantly more than their peers at fund of funds. Here's @HedgeHog on how that difference is justified.

Well, some quick math for context. FOF are doing business for about 50bps flat these days. Even if you were SUPER generous and said 1% (most FOF or similar business are probably south of 50bps to be honest), you're talking 40% of the revenue for the same AUM of a 1.5%/15% hedge fund in an 8% gross return year. At 50bps, it's 20% of the revenue. Some FOF are taking mandates at 15-25bps. Like most jobs in finance, at an entry level, the comp is probably fairly similar. The more senior and successful you become, the quicker you'll see the ceiling at a FOF. There is just not enough revenue to pay employees/partners big money (relative to HF) these days.

Hedge Fund Pay vs Other Locations and Compensation by Geography

How does hedge fund compensation compare to the likes of investment banks, private equity firms, asset management firms, etc.? One important fact is that hedge fund compensations differ across firms wildly while other financial institutions are typically more uniform in pay across firms.

The only financial institutions with comparable compensation to hedge funds are private equity firms. Here's why from @MidtownParkAve.

I would also argue that pay is not higher in most HFs than in PE. Carry at a PE fund becomes powerful if your fund is successful. HF pay has much more annual volatility, and there is some component of deferred or vested comp virtually everywhere.

Carry at private equity firms is the factor of compensation affected by performance, similar to the bonuses in hedge funds. The main difference is that carry in private equity is far less volatile than hedge fund bonuses, which range from nothing at all to as much as several multiples of base pay.

Hedge Fund Pay by Geography

There are hedge funds in New York, Chicago, Greenwich (CT), San Francisco, etc. Does the pay differ by location? The answer is, quite simply, no. In America, geography is a not a determinant of compensation for hedge funds.

Hedge Fund Manager Salaries - Invested into Fund?

Investors like to see a hedge fund manager with skin in the game. A manager not invested in the fund is a major red flag. It signals a lack of confidence in the fund. That said, it's not integral that a hedge fund manager have all of their liquidity tied up in the fund. Here's @BlackHat on the expectations for hedge fund managers.

Well, not their salaries... but I would never invest in a fund that didn't have something close to the entirety of the shot caller's money at stake alongside mine. Don't call yourself a chef if you won't eat your own cooking.

The case for startup hedge funds is different. When starting up, managers are expected to be all-in on the fund, more on that from @Bondarb.

As someone who has been involved with seeders that tend to fund smaller startup hedge funds, it is almost a requirement that the managers at small shops be "all in" with their personal money.

If you want to not put all your money in, you need to have a good explanation as to why...like maybe because you need money for a very sick relative but certainly not because, "I can't make rational decisions with my own money at stake." That's not exactly the type of person you want managing money for you.

People want the manager to be as freaked out about losing their money as he would be his own....so I don't think you'd do very well telling an investor that you won't put your own money in because it won't allow you to be sufficiently reckless.

Original Thread - Seven Figure Salaries in Hedge Funds

This may be considered a stupid question, but I am curious and have not found the answer after searching the net so I will ask anyway. I have read that "it is not uncommon to see a person in their late 20s or early 30s pull down $5 million a year or more in one of the right positions at the big funds," but most of the positions I have read about, even at places like Bridgewater, only make low six figures. Maybe the compensation is higher including bonuses, but it seems like the way to make millions is to start your own fund and hope it does well. What would be the best way to make the most money in HFs?

This is my first post, and I don't want to seem like I'm not genuinely interested in finance and all I care about is money, lol. I have been browsing for a while, and I'm wondering about what seems like contradictory information.

Comments (15)

5/31/10

Also interested.

Hedge Fund Interview Course
5/31/10

It depends on the fund and your seniority. I think most junior traders, analysts, risk management, etc. get around 200k+ on average, but once you get closer to the money(portfolio manager) and more responsibility, you will get paid more in line with what profit you generate. It also depends on the size of the fund, assets under management and profitability.

I believe in the hedgefund industry, the pay is overly skewed at the top level (say top 20% of the performers), while the average fund does not pay outrageous compensation. With all the recent competition, it's going to be harder for the smaller funds to exploit opportunities for profit.

5/31/10

here is a prime example of how journalists overstate the general pay in the financial services industry. Usually only actual portfolio managers at big funds are making that kind of money and its very rare for them to be that young.

5/31/10

it is very very uncommon for someone in their 20's or early 30's to make 5MM in a year at a large hedge fund. Sure, it has happened but it is not common at all. To make 5MM at a hedge fund you generally have to be a PM running a good amount of money and put a good return on it. Depending on the payout your talking about somebody who made like 20% on 250MM or something comparable...very rare for someone in their 20s to have that type of capital. And I have never heard of an analyst making that type of money.

5/31/10

I wanted to reiterate what was said above regarding analyst salaries - they are typically in the low six figure range. It seems likely that what is being reported is a 'skewed' average? Consider the hypothetical where 100 analysts make $200K each (which I think is on the high side but lets play along) and there are 10PMs who make $20MM. This skews the average hedge fund salary to $2MM. Perhaps the median or modal salary would be a better indicator.

Ante UP!

5/31/10

how does that work for a value oriented fund that might only have one gp fulfilling the "portfolio manager" duties. funds like this can manage 1bln and have 10 investment professionals. with a 20% return, there are 40mm in incentive fees. in this scenario could the senior analysts (in their late 20s/early 30s) be making 3-5mm?

5/31/10

Titan, good point.

5/31/10

According to Alpha Magazine's 2007 Compensation Report, the median salaries for jr analysts and traders were about 200k while Sr PMs made about 500k. A nytimes article from the same year seems to give the impression that people that work at HFs can make much more.

http://www.nytimes.com/2007/09/16/business/16mba.html
Mr. Hammond started his own hedge fund instead of getting an mba, and (at the time of the article) manages 300mm and makes seven figures at 28. Later the article states that analysts and researchers at funds managing 1-3bln will make 830k.

Both of these are a few years old but perhaps they hold some relevance.

6/1/10

The key to making millions is to start your own...anything. Though I'm not sure "hoping" it does well counts as a sound strategy.

With respect to hedge funds, just like most of finance, the majority of comp comes in bonus form. I have a friend, 30 years old, who was a PM at a very large distressed debt shop. His salary was ~150k range, but his bonus (2008, the shit) was around $550k. Scale that down on both sides for the analysts. Hell, Lloyd Blankfein only pulls mid-six figures in salary (even before the crash). It's bonus, stock, and that magical "other" that line the pockets.

The same is true of almost every high level executive, at least in public firms. There are very, very few public company CEO's whose actual salary is 1mm+.

6/1/10

It's not entirely unheard of for hedge funds to give guaranteed seven-figure contracts to traders and PMs with very strong track records. The 28-year old superstar trader at Morgan Stanley left for a hedge fund that guaranteed him $25 million. And SAC Capital guaranteed one trader $5 million/year.

6/1/10

Just to reiterate chimpb's post, how do analysts at value/event-driven/activist type funds do? I know overall fund performance is a huge component, but in good years can analysts, say late 20s, pull close to a mill base+bonus or is that a range average PM's make?

6/8/10

Smaller shops is where you can make a killing. Get picked up by a smaller shop and they are typically very generous.

6/25/10
thinker481:

Smaller shops is where you can make a killing. Get picked up by a smaller shop and they are typically very generous.

atin
7 figure salaries are paid more frequently than everyone here is thinking

1B fund - will generally have 3-6 analysts and 1-2 fund managers depending on structure - no more than 10-20 people in the entire fund.

Off the 1B you are taking in $10mm management fee - this should cover expenses pretty easily. If the fund does well and generates 20% for the year you just pulled in another $40mm to be payed out in bonuses or deferred comp.

If you splurge like a rockstar and spend all 10mm from fees you still have $40mm to pay out amongst 10-20 people, with the analysts and managers taking the bulk of it.

6/26/10

Never underestimate the cheapness of hedge fund managers. I work at a top macro fund and million dollar salaries are very very rare for analysts even during years when the fund takes in hundreds of millions of dollars. Bottom line is that people start hedge funds to get very rich and they are going to keep as much as they possibly can without causing massive defections. The bigger the name of the fund the more they can squeeze the analysts. I have some stories that would curdle your stomach about analysts playing big roles in making huge sums of money for the firm and then either getting an insulting bonus or even getting pre-emptively fired so that they cant state their case for getting their fair share of the cash. It's a very cut-throat World out there. Bottom line is that to reliably make 7 figures at a hedge fund you have to manage money, not just funnel ideas to PMs.

Analysts generally are considered interchangeable and portfolio managers who know how to trade and manage risk are far more valuable and much more rare then analysts who can help generate trade ideas.

8/25/10

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