HF Bonus expectations

Ignore my username title I just can't be bothered to change it.

I'm coming to the end of my first year as a research analyst at an equities l/s fund and have my bonus discussion coming up.

My background: Prior to this I spent 3 years as an IBD analyst so I'm coming to 4 years total experience.

Fund details:

Current AUM: $200m

employees: 5 (investment team) and 6 back office (tech support, finance etc..)

Pay structure: 20% performance fee above a 10% hurdle (annoyingly we have a very high hurdle rate)

returns: in the last 12 months overall we made around 25% which is approx $40m, after the hurdle rate that leaves us with around $24m and then taking our performance fee gives us around $5m in fees for 11 people 

Despite being in my first year / the most junior I actually pitched a company I loved to the team as soon as I joined and they all liked it and agreed with my proposal to invest, this investment actually proved to be our most profitable investment for the last 12 months, we made over 100% returns on this trade which countered some losses in other assets and so a decent amount of that $5m performance fee came from my investment, our performance fee from my investment idea alone worked out to be a little over $1m. I now have my bonus discussion coming up and want to know realistically how much I could expect? I feel I deserve a lot given my idea was the most profitable, e.g. one of the reasons I chose a HF is so I can be paid based on my contribution rather than based on  politics/hierarchy in places like banking and PE but at the same I understand this is only my first year as a research analyst at the fund and I'm not a PM so my bonus isn't linked to PnL

What should I expect given the above?

Thank you

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Comments (40)

Mar 31, 2021 - 12:14am

You already said your bonus isn't linked to PnL, so whatever amount the head of the fund decides to give you

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

Mar 31, 2021 - 9:16am

Could be anything, that's my point. The founder can be an asshole and keeps most of the performance despite you contributing a top performing idea. The founder can be super generous. 

Bottom line: lower your expectation, you are not at the stage where you truly eat what you kill. 

Instagram: @dickthesellsider | Substack: dicktoad.substack.com

  • Prospect in IB - Gen
Mar 31, 2021 - 8:08am

Any idea what this could be? I'm hoping for a bonus around $400k, unsure if this too high expectations? 

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  • Investment Manager in HF - Other
Mar 31, 2021 - 8:34am

That seems to high unless your PM is very generous. 

You said $5mm across 11 people (5 investment professionals). Let's say they only pay to the investment professionals, and give equal to everyone except founder (although you said this is your first year, so I assume you are the most junior person). $400k for 4 people and you are left with $3.4mm for founder/PM. Seems highly unlikely for many reasons, 1) I'm guessing other people contributed as much/more than you and 2) I'm sure there are senior "BO" people who will take some. 

Unless you have an agreement on PnL, I wouldn't anchor too much to your idea being worth $1mm and even if it was, you only collect 20% after a hurdle (unless you are saying $1mm in fees, Edit: I see you are saying $1mm in fees, still would think unlikely) so you want $400k from that?
Also, what is your base? Normally you'll see firms be pretty standard about 1-1.5X base. You are at a small fund, so all the "standard rules" are mostly thrown out the window, but if I were to guess, I'd say $100 maybe $150k (hope for your sake I'm wrong). 

Mar 31, 2021 - 12:24am

They'll pay you the bare minimum for you to stay put. In your discussion with them see if you can negotiate a P&L cut for the following year. 

  • Prospect in IB - Gen
Mar 31, 2021 - 7:19am

Is it normal for a junior research analyst to be given bonus linkage to PnL? i thought that was only for PMs and senior research analysts?

Mar 31, 2021 - 11:51am

Let us know what you get but your PM is not running a tight ship and I'm going to guess it's more like ~$150k bonus for you.

FYI when we were at $500mm we had less FTEs than your team, and nearing $1bn now with less back office.

Mar 31, 2021 - 1:01pm

Missed OP response and your in-depth response. You covered the situation. Truly I am a bit surprised by OP base if discussion of P&L linkage was not made yet. Maybe part of their bonus this year will be to start that discussion. Cause base of 90k and prolly 1x bonus in normal year, one would start looking elsewhere fast.

Mar 31, 2021 - 1:00pm

Hate to say it, but often small funds often don't care about their reputation and pay just enough just to keep ppl. Much of it comes down to the main guy, if he's generous or not. Often time PMs (small or big funds) aren't generous and have an over inflated view of themselves. I worked for a multi-billion SM once where the PM regarded everyone as 'window dressing' and there was abundant historical revision when it came to idea generation. So, be prepared to be disappointed. 

  • Investment Analyst in HF - EquityHedge
Mar 31, 2021 - 1:19pm

Best of luck with the upcoming bonus discussion.

You said that your fund made 25% returns over the last 12 months? One thing I want to flag is that your TTM returns are off of the market trough. I'm guessing that your fund runs with positive beta to the market? If so, you should bear in mind that you might have trouble hitting that hurdle in a more 'normal' year, and that the bonus you do receive this year might not be a good indicator of future bonuses. I agree with other posters that the economics here aren't great at this current AUM/headcount ratio. Just my two cents.

Mar 31, 2021 - 5:45pm

Agree with other posters. $250k likely the ceiling, maybe $100k the floor.

Also, I would encourage you to think abt how much you deserve more broadly. Analysts tend to focus on perceived contribution, but ignore opportunity costs. What did you do the rest of the year? Did you say "pass" on potential ideas that then doubled? PMs are likely to consider these types of things when thinking abt comp, so don't be surprised if something like this is used against you.

Finally, I imagine you're aware of this, but your fund is seriously overstaffed for the AUM is running, and the 10% hurdle is a  b*tch. Unless they can raise meaningful new capital and I guess keep performing above 10% (neither is easy), you're never going to earn the big bucks there. Sorry, but it had to be said.

  • Prospect in IB - Gen
Mar 31, 2021 - 7:42pm

Thanks for the reply. 
Damn it's annoying because one of the reasons I chose a HF over PE was because I wanted to be paid based on my performance rather than years of experience / any politics and shit. Pretty disappointing to find this isn't the case but I guess it's my own fault for having these high expectations.

Yeah the 10% hurdle rate is very painful, what would you say is the average hurdle rate for equity L/S HFs?

Damn, I didn't realise this AUM per head was bad, when you say overstuffed is it the investment team specifically or our back office ? Or both? what would you say is a good AUM per head ratio? Thank you 

  • Investment Analyst in HF - Other
Mar 31, 2021 - 8:56pm

To give you some perspective I work at a $4B fund and I am apart of a 9 person investment team. BD, compliance, and traders is about 10 people.

Mar 31, 2021 - 9:36pm

Your firm is definitely overstaffed. 

It's hard to say what is the right AUM/headcount, but I worked in a $3.5bn fund w/ 6 investment professionals and 5 BD/back office ppl. So about the same size as your team but much higher AUM, we considered that fairly lean.  

On the opposite end of AUM/headcount I remember once recruiting for a $60MM startup fund founded by a "well known" former CIO that had nearly 10 ppl (FO/BO) in total. I passed on the offer and thought the fund would never work out, it closed a year or so later.  

This is partly why MM funds are so popular right now, no need for all that back office / BD ppl and the PM takes a % cut of profit. You have plenty of sub-PMs at the MM running $200MM+ by themselves with a straight formula for returns.  

Mar 31, 2021 - 9:54pm

In all honesty, I think most HFs don't have a hurdle. Rightly or wrongly, because they market themselves as "absolute return", I'm pretty sure most of them start earning performance fees on anything above $0 P&L. Maybe smaller start up funds need to do this to convince LPs to pony up funds, but in established funds hurdles are a rarity as far as I know.

Apr 1, 2021 - 9:40am

When I went in for my first bonus meeting my PM told me, "I've been doing this a long time and what I think I should get paid vs what I get paid is always different. 95% of the time I have come out disappointed."

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  • Associate 1 in IB - Ind
Apr 2, 2021 - 1:02am

Would say this might be a lesson in negotiation for the future. ASO1 pay is fairly standardized at $150k base + 100-125% bonus (so north of 300k all-in) and you looked for, then signed up for something with a defined $90k base. You should have negotiated for some sort of incentive system / anchor in your contract given that even your upfront comp would be slashed almost in half (150k base -> 90k base), much less the added nebulousness in all-in comp. Additionally, a $200mm fund is very, very small so not sure why you took this job in the first place if there was no promised upside given the risk 

My guess is that perhaps you weren't going to get promoted, and you didn't actually have that leverage? Or were you expecting a min. 250% bonus to essentially meet the "status quo" without having anything in writing? Or maybe this was a lifestyle move, going to a lower COL city, etc? 

Regardless my suggestion is that since you already messed up somewhat at some point (either had leverage and didn't use it, didn't have leverage at all, didn't do enough DD in switching jobs), just be grateful for the job and to take whatever bonus comes without spite (will only come back to mess with you negatively). Advocate for yourself but at the end of the day what you get is what you get. If what you're writing is true, then this serves as a good precedent for future interviews at other funds where you have a solid success story. Others here have already commented on the poor fund economics so would start talking to some HHs now

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