Hedge Fund Management Company Qs
Hey All-
Can someone explain the dynamics of a hedge fund management company to me?
Specifically:
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If I’m a partner at a hedge fund (let’s say I have 20% equity ownership in the management company by way of example), how does this read through to compensation? I assume I would get 20% of the management fee, and 20% of 20% of profits (assuming a 2/20 Structure).
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What percent of profits is typically reserved for partners of the fund, and what % is paid out to employees as a bonus? I would assume ~70-80% (maybe more) is reserved for GPs and the delta is used to pay out employees?
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What’s paid out first? Partner distributions or bonuses to employees? I would assume Partner distributions?
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Let’s say you have multiple Partners at a fund - 7-8 by way of example - how is it decided who gets paid what? Is it an even split of profits, or is it dependent on your equity ownership in the fund management company?
Thanks in advance - any advice is greatly appreciated.
I'll caveat this by saying that I can only speak to how things work at my fund, which is a plain vanilla $bn+ SM fund (i.e., we are not Tiger; we do not run multiple strategies and funds, etc.).
1. Using your example, if you own 20% of the firm as a partner, then you are entitled to 20% of all the management and performance fees that the firm generates.
2. At my fund, this is not really how we think about it. Partners are entitled to management and performance fees. We have a few senior analysts who get a % of the performance fees but not the management fees. All other employees (research and back office) are paid out of management fees.
3. At my fund, there are no profits that are "left over" for employees to share in after partners and senior analysts (who have a % of the performance fee) are paid.
4. In this example, the partners will be paid out based on their % ownership.
The other point I want to make is that a fund can also have other claimants on the fund's management and performance fees. Oftentimes, funds take seed capital to help them get off the ground in exchange for a large % of the fund's economics (i.e., Julian Robertson), so these guys are oftentimes some of the largest "partners" in the fund outside of the founder.
How do you guys decide what percentage of performance fee to pay to senior analysts? I guess rather than seeing a range, I'm more interested in understanding the mechanism by which you decide on a specific percentage to pay out.
I mean, there is no real magic to this. We backsolve into a % that would yield a reasonable comp figure for a senior analyst.
Agree with what the other poster said. In general funds will back into the number that makes sense based on market comp (AUM, expected performance, fee structure). People who are more valuable (run more risk, have more say in the fund, have better ideas, etc) will get a higher share, others lower. The real upside comes in outperformance or if at a more junior fund in performance + AUM growth (although at established funds the AUM growth is usually not a big driver as they tend to be at capacity). Nothing all that complicated really.
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