Hedge Fund Compensation in a Banner Year

The question of the day is this....

I work for a relatively small fixed income relative value hedge fund that has had great returns. I've been here for several years and am now in charge of all trading (but we don't trade that much). We all contribute to every aspect of research and modeling and every one here is a master of all aspects of the fund.

2009 was RETARDED and we were up a ton and the fund earned crazy monopoly money in management and incentive fees. Our overhead is minimal because our office space is a tiny and dumpy and nondescript. Our biggest expense is bloomberg terminals.

My cut as essentially the #3 guy was a bonus of less than 1% of that 2009 windfall. I was thinking I'd get at least 2%-5% of that because (this sounds cocky but it's true) I'm kind of an important part of the puzzle here (lol... I guess I was wrong about that assumption) and if I walked out the door, the boss would be F'cked up for a while trying to replace me (but he'd tell you that he's "OK with that.")

The boss is now managing my expectations down for 2010 saying that our returns of 2009 won't be repeated. So I ask you all, what do you think I should have been paid? And should I shine up my resume for job turnover season after year end 2010?



Comments (40)

Best Response
Aug 5, 2010 - 1:41pm

I'm not sure how helpful this will be but, if you'll permit me an observation, the time to leave was when they handed you a shitty bonus after a barn-burner year. As in, that day.

Coming off a year like that, a year you know you'll never be able to duplicate in a million years, and then getting handed a check for roughly $200,000 when you were expecting up to $1 million+ is unacceptable as far as I'm concerned. And now you say he's already managing your expectations downward for this year's bonus?


You have to be realistic. If they're not going to pay you when the fund has a record year, what do you think you're going to make when they have a bad one? Or just an average one?

As to what they should have paid you, it looks like your boss knew exactly how much you were worth because you didn't bail when he handed it to you. I'm not trying to be a dick here, it's just good business on his part. He could have paid you a million bucks, but he paid you a quarter mil, pocketed the difference for himself, and still got another year's work out of you.

I'd consider the $750,000 you didn't get paid tuition, and I'd thank him for the lesson on my way out the door.

Aug 5, 2010 - 2:30pm

Edmundo is right on the money here. An RV/Credit shop's trader is a particularly important role, and being the #3 guy makes the story worse. A $450mm fund that has put up 18% for 9 years is working on a pretty small capital base though, so if all/most of the original money is his that might change things a bit.

Mar 30, 2011 - 3:08pm

Thanks for the input guys and girls... Sounds like the status quo..... I'm fucked and I'm the sucker at this poker table.

I want to be the best paid nobody that you never heard of.
Aug 5, 2010 - 5:50pm

The Ivy League kid should have made more than the number you're suggesting. I would address the issue and then walk out.

"If you can count your money, you don't have a billion dollars." - J. Paul Getty
Aug 5, 2010 - 8:38pm

Head trader is a nebulous term. You are an execution guy. Bottom line is that 200k is not out of line for an average execution guy at a fund of that size. Now you are the only execution guy therefore i guess you are the "head of the desk" but that dosen't mean that you are going to get paid like you take risk and make the "big call" on the firms capital because you dont.

Bottom line is that the majority of Hedge fund managers are extremely greedy which is why unless you have an ironclad deal in writing (ie you are a PM) the business can often be very unfair pay-wise. I would take your current experience and the firm's reputation which i assume is good and try to parlay them into a position elsewhere where you can actually run money.

At the fund I work for, the execution guys (which is what you are) have a saying..."banks are setup to make thousands of people millionaires, hedge funds are set up to make one person a billionaire". There is some truth to that.

As an aside, I worked for a few years at a rates RV fund and I am surprised that I dont recognize the profile of the fund u describe above...450MM, 20% a year for a decade, and 132% in 2009? I am surprised I havent heard of this fund since the relative value universe is fairly small especially nowadays.

Aug 5, 2010 - 9:11pm

i'll give u a story to illustrate...i know of an execution guy who worked exclusively for one PM at a large fund. The PM was running billions...he was the #2 guy at a huge name shop. A few years ago said PM made about 300MM bucks in P and L on a single trade during the subprime crisis. The PM probably took home 30-40MM personally that year. The trade had been 100% managed by the execution guy...it was not even in a product that the PM had ever traded or really understood. The execution guy approached the PM with the trade, convinced him to put it on, and then managed it once it was on. I have no doubt that the execution guy was fully expecting a pay-out in the neighborhood of $5MM or so.

At the end of the year, the PM went to the head of the fund, told him that the execution guy sucked and that if they had somebody who actually knew what he was doing they would have made 600MM on the trade. The dude ended up getting a bonus of investment bank.

This can be a ruthless business.

Aug 6, 2010 - 8:26am

Wow...that is one hellauva story Bondarb. From the above dude's post I gathered that he wasn't just execution....it sounds like he is involved in idea generation and presumably could argue for attribution on some of the ideas involved in generating that 25m profit. If I was right in assuming that, then there is just no way he should have gotten paid the scraps he got paid.

I mean if one of the dudes is compliance there were 4 idea generators on your team and you are not the most junior, 25 mil to go around and you got 200k??

I would have quit the second he handed me that check...

Oct 21, 2011 - 2:22pm

I know most people would say that I should have walked out the door the moment my 2009 bonus check cleared; however, the reality is that my skill set can best be described as a jack of all trades and a master of none. I unfortunately don't have the 5 year portfolio manager track record that I can tie to my name. I don't have a contact list of customers that I can bring to a sell side shop. I don't have countless relationships with sell side or buy side big shots all over the street. I don't have an MBA from the Ivy League. And I don't have my CFA designation. I am a regular hard working guy with more than half a brain between my ears and the desire to learn and contribute in any way I can without whining or complaining. Basically, I'm going nowhere fast in this business
With all that in mind, I realize that I'm a lucky guy in a fortunate spot; however, the squeaky wheel seems to get the oil in this business and my lack of squeakiness seems to be putting a ceiling on my career path and compensation potential. Here is the deal: I was able to assume risk tied to my name and I made some nice returns for our fund. Without abandoning any of my prior responsibilities, my P&L was enough to put more money in my boss' pocket than he would put in my pocket at the end of this year. That's right, I am now an employee who pays my boss to be there, and I am perfectly ok with that; however, I was quite surprised and felt rather bitch slapped when my discretionary cash bonus this year was 25% lower than it was in 2009.
Help me get my head in line here. In 2009 the fund was 40% above its high water mark and my discretionary cash bonus was X. In 2010 the fund was 15% above its high water mark and my discretionary bonus was 75% of X. My trade / portfolio mgt portion that is tied to my name surely was positive, so net net I'm taking home more money in 2010 after assuming risk and putting a lot of money in my boss' pocket. But I was apparently crazy disillusioned to think that my discretionary cash bonus would remain the same at least.
Rather than telling me that I'm being taken advantage of and that this business is full of greedy bosses and that I should quit asap, I would appreciate any input on how I can politely yet firmly discuss my pay concerns with the boss. Oh and by the way, candid discussions with people who are both familiar with my job and the fund where I work as well as people who are unfamiliar with my position and employer have said that the perception of me is that of the #2 guy / portfolio manager / trader at a phenomenally successful hedge fund, and I deserve multiples of what I'm getting.

I want to be the best paid nobody that you never heard of.
Dec 28, 2010 - 4:07pm

You need to tell your boss that next year you want a separate PnL that is yours and you want to be paid a percentage of that number. Tell him that you have worked hard for him for a long time, made him money, and that you deserve this step up. Make it clear that this will not effect the other execution aspects of your job and that you first commitment is to him and the firm.

Mar 30, 2011 - 3:13pm

Thanks Bondarb. I actually do have a separate P&L that is all mine and I get paid a percentage of those profits (or I lose a percentage of those losses vs my discretionary cash bonus if my P&L is negative); however, the risk limits are quite small (less than 5% of the fund) and they were not expanded for 2011. I think I have to do some kicking and screaming for at least a doubling of my risk limits because I was up 15% on the small portion that I was allocated last year, and shouldn't I get a chance to play bigger if I've made money? It's gonna be awkward because I think my boss is more than a bit out of touch with the reality of compensation even though he pulls down $10million cash in a bad year and $20million cash in a good year. His thriftiness is starting to look like greediness more each year. I know I know I should find another job if he doesn't accommodate my requests, but let's be realistic here........ this business if riddled with douchebags and sometimes the devil you know is better than the devil you don't know.

I want to be the best paid nobody that you never heard of.
Mar 22, 2011 - 9:53pm

Unfortunately I have just learnt this very hard lesson myself. After loyally sticking by my employer through thick and thin and helping generate large returns over nearly a decade I am being shafted on my bonus in a big year. Similar to the OP, I am the next in command guy in a small and relatively unknown fund (industry insiders might know if only because of the strong returns) with a handful of employees. Due to bleeding assets the fund now runs mostly the principal's money. I am certainly not in an execution only role and do call the shots as well, but I don't have a P&L contract. Of course there are no fees to speak of or pass around, but the P&L generated was over 10mm. My share? A pittance even for a first year MBA or 1-2 yrs out of undergrad.
Derivstrading and Bondarb are 100% correct with quotes right on the money:
"This can be a ruthless business."
"Relying on the benevolence of others is not what this business is all about."

Still, I can see why D-Rock did not just walk out of the door, as I am stuck in the same situation. No fancy MBA, list of clients or personal track record to sell.
Guys/girls - take the advice here, and always try to get a P&L deal/contract if you are in a revenue generating position. This way you get paid what you are worth, even if that is a big fat 0.

Jan 5, 2012 - 8:57pm

Very interesting interview there. I have to say the Australian stuff is pretty impressive.

He bot a 20y10y pay at 100c and got on the massive neg basis in x-ccy basis... both of these were pretty crowded trades at the time. His trade in 6y us breaks was pretty good but his long-end gilt trade is a complete cluster fk. All these ideas were ideas du jour in rv at the time.

May 26, 2011 - 12:54pm

I am almost 100% certain I know exactly who D-Rock is. Not a nobody anymore !

The one who does not fall, does not stand up
Jun 5, 2011 - 6:34pm

I am almost 100% certain I know exactly who D-Rock is. Not a nobody anymore !

speak monkey...
If I had asked people what they wanted, they would have said faster horses - Henry Ford
  • 1
Jun 6, 2011 - 4:56pm

Don't speak, outing somebody who came to this board wanting to remain anonymous would be douchy at best.

Shame, happy, shame. ;)

"You stop being an asshole when it sucks to be you." -IlliniProgrammer "Your grammar made me wish I'd been aborted." -happypantsmcgee
  • 2
Jun 6, 2011 - 5:17pm

You sound like an operations back office guy. Pay is about right.

"The higher up the mountain, the more treacherous the path" -Frank Underwood
Jun 15, 2011 - 12:36pm

You sound like an operations back office guy. Pay is about right.

Yes, I've come to realize that my career has peaked and I am an easily replaceable "support" staff at best. Time for me to shut up and live a modest life until I retire at the young age of 95.

I want to be the best paid nobody that you never heard of.
Jun 15, 2011 - 2:21pm

You sound like an operations back office guy. Pay is about right.

Yes, I've come to realize that my career has peaked and I am an easily replaceable "support" staff at best. Time for me to shut up and live a modest life until I retire at the young age of 95.

I know you're joking but I have to say props on your career path so far. I found you on LinkedIn and it seems like if your boss isn't willing to let you go beyond being an execution guy (unless that's what you want), you might be able to move to another RV fund to do research/strategy.

Jun 15, 2011 - 7:07pm

You sound like an operations back office guy. Pay is about right.

And if there's one thing a Baruch grad knows, it's the back office. (Apologies to my Yeshiva friends)

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
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