Hedge fund PM payout formula
Assume I am a PM managing a 100mm portfolio at a HF, base salary is 200k, expenses are 300k (tech, systems, rent etc. also, I work alone with no analysts) and my payout is 15%.
If I generate 5% return, I make 5mm for the fund.
Is my before tax total pay given by (5mm - 200k - 300k) * 15% + 200k = 875k OR
(5mm - 300k) * 15% + 200k = 905k OR some other formula.
How is this payout structured at HFs for PM ?
Thanks much.
Typically your salary is a draw on your end of year payout. So assuming that's the arrangement then total payout is simply (5mm - 300k) * 15% = 705k where 505k gets paid out as a bonus and 200k as salary during the year.
Granted all that is negotiated so can vary quite a bit but could potentially have half the salary be top line and the other bottom line. But that's going to be more likely for your analysts rather than the PM.
As a quant what are some of your expense figures like in a ball point range per capital? What tends to stay at a fixed cost excluding leverage, and how does leverage cost tend to vary?
Financing/borrow/short rebate are basically a fixed %. It varies based on prevailing interest rates which haven't changed sufficiently over the past few years for me to really notice.
The data/technology I use doesn't vary based on book size so it is fixed. It's over 1 M right now which is actually pretty low compared to a lot of firms. Then there is compliance/office space/legal etc. The amount I trade and the degree to which I chase low latency opportunities does have a large impact since all that tech isn't free but not really a function of book size but rather how often I turn the book.
Thats very helpful. What are the typical total expenses including 200k base salary fior a PM.
Thanks
I run a quant book so can't speak for L/S or anything else. But for me financing is the largest expense (lots of leverage) then data and lastly technology (cloud compute/storage, colocation/exchange port/cross connect fees etc). But I'm guessing you're not talking quant so not giving the numbers as probably not helpful.
That's interesting leverage is your highest expense. I guess the others are fixed costs so once you scale its more cost-effective. Do you work at MM? Would the financing cost come out of your PnL?
Technically am a stand alone hedge fund (RIA with the SEC) but have funding from a single investor and taking other outside money would be non-trivial so I consider myself to effectively work for a MM but used to work at Millennium. Financing does come out of pnl as a top line expense. Correct, the tech/data expenses are fixed whereas financing is a direct function of the book size and kinda have to run a lot of size these days in the quant space to make it worthwhile given the expenses.
That's interesting its hard for you to take on external capital. I've heard that MMs are now starting to let PM take on external investors in separate accounts.
What is a lot of size? I've seen books survive quite well at 500M gmv (which I consider small to medium sized for a MM), assuming equity market neutral.
Actually, I'd probably more concerned about signal decay. Anecdotally, a lot of signals don't work so well in US and across the board signals are decaying faster than they can be discovered.
There would just be more audits that would have to happen. Also couldn't leverage the current prime relationships directly, so wouldn't necessarily have the same financing/commission rates which right now are pretty low so it would just be non-trivial to take other outside money. Also no need, have to turn away capital right now from the current investor due to capacity constraints on the current set of alphas.
I am equity market neutral and running 1 billion right now which is large size relative to the 100 M in the original question which to me is nothing (with my costs just couldn't make enough to operate). But I do consider myself small fish as my friends are running much bigger books doing similar things. Everything is relative I guess.
Signal decay and information leakage via market impact while executing to me are the biggest issues. Been doing this going on 15 years now and some of the stuff that used to work was so simple and just died. But it's all still there just have to be more scientific in the approach and have better execution as compared to the past at least in my experience.
Wow! You're a veteran. Did you start managing money pre '08? That deserves respect for surviving so many different market conditions. I've met fair share of PMs but they all started managing money after 2011 so don't know how they'll do in the next shake up. If you're starting today would you still choose quant?
haha I guess so. I was on a stat arb desk at an IB in I think 2005 albeit rather junior but in 2006 was running a short term strategy that varied greatly in GMV but would put on like 300M at times, haha sometimes I wouldn't even hedge it, the good ol' days. The part of the desk running factor models lost like 100+ M in 3 days during the quant crash in 2007, size got cut and the loss realized.. that was crazy. 2008 was awesome, absolutely printed money, was considered HFT at the time trading 1-2% of the market but in reality was capturing ultra short term alpha just due to lack of competition of real HFT which started to eat my lunch in the years following.. biggest regret is not chasing low latency opportunities back in 2006-2008, would have been a lot more successful if I did... in hindsight didn't really know wtf I was doing.
I don't think I'd choose quant now if I had to start as a researcher for example. When I started I was considered a "trader" and got to see all parts of the business so have really been able to learn things in and out. Can honestly say I know what I'm doing now. But as a researcher these days you're usually pigeonholed and sometimes explicitly forbidden from doing certain things so hard to really learn all the necessary parts (understanding of the market to create real alphas/proper research process/portfolio construction/execution/tech to support all that). Often now just a cog in the machine... ehhhhh
Seriously who considers “financing” as an expense?
Financing is just a part of the profitability of a trade.
Like if I’m doing something simple like leveraging 10 year US treasuries. I don’t consider the 1.8% yield as pnl and 1.66% or so repo rate as an expense. I just consider carry as 14 bps and trade pnl as carry plus change in price.
your borrow costs are higher than your tcosts?
Are you speaking in absolute or % of gross profit? Only two situations I see this happening is if you have a really high turnover book.
Unless it is a firm with expense pass-through structure, usually it is more like this:
Investment Net Return: 5mm - 2mm (LP pays 2% fees to GP so it's taken out of return) = 3mm net return
The 2mm goes to firm management for ops/rent/marketers so PMs don't see any of that
Assume firm gets 2/20 fees, gross revenue for the firm is $3mm x 20% = $600k
Subtract 300k, then the bottom line is $600k - $300k = $300k
Assume you get "15%", i.e. 75% of the fee (sounds very high if it's not a pass-through), you would get $225k, so $25k bonus after the $200k salary.
Are there any firms that are interested in 2-5mm net returns unless it is very high Sharpe?
Generally no, it's much too low. Anything below $10mm is too low.
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Am I missing something here? Why are you not reducing the 5mm based on the LP/GP split of 80/20 (if you're lucky)? Why are you assuming you're comped on the full return. Are there no LPs and its all internal capital?
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