How is HF portfolio manager compensation structured?

Ravenous's picture
Rank: King Kong | 1,521

Obviously, base plus bonus, but I am looking for the typical structure of pay outs on the bonus -- how is that determined?

I am interviewing with a L/S equity fund right now for a PM / partner role. The founder of the firm told me on the phone last night that I am their leading candidate and wants to fly me back out to meet them again on Friday / over the weekend. I think it is likely I will receive an offer.

The fund has a few hundred million AUM and intends to raise additional capital (they have a 20 year history so that's likely, though I will check it out in more detail before accepting). My job would be to build a team and create a small cap special situations book from scratch doing whatever is necessary to make that happen, and I would then have complete discretion over the book (size of AUM tbd but likely 100-300 million) with a small team of analysts working for me.

I have done similar work at my current firm and I know it will be a shitload of effort, so I want to make sure I get paid appropriately. How should I think about structuring the comp? Founder has talked about base + bonus and possibly giving me some equity in the firm in some way (details TBD).

Also, I am wondering what I should ask for in milestone payments since a good chunk of the work is non-investment related. If I take the job, I will be bringing significant "systems" expertise to improve their investment research process (and will need to set that up which will be time consuming), will be hiring new analysts and training, will be involved in capital raising discussions / marketing, etc. I am not interested in doing those things "for free," and while those items are partly covered by the base, I want to make sure I don't spend too much time on non-performance related tasks without getting paid.

So basically, price this role. I don't trust anyone at any firm to make me a fair offer, so what should I ask for?

Any input appreciated, especially from any current equity PMs. SBs for all helpful replies.

Comments (21)

May 30, 2012

Interesting situation, wish I had something to add but I'll certainly follow. On a related note...accepting resumes for analysts yet???

If the glove don't fit, you must acquit!

May 30, 2012

Not yet, have to get the job first.

I should add too in case there is any confusion -- the target AUM would ramp, it is not a day one situation. I have proof of concept on a $40mm book (sub-portfolio at a larger shop) at my current shop and this new firm wants to leverage my experience to repeat the same investment process on a larger scale. I am taking a risk that it will ramp to that (if at all) and want to be compensated generously if it does with competitive performance.

May 31, 2012

Not a PM so take me with a grain of salt, but my general understanding in the industry has been that if you make yourself indispensable you will be paid over the longer term--and if not you leave. Your situation sounds unique enough that you should have plenty of influence over comp structure, if not dollar amount. As long as base is in line with your experience and covers your needs, "fair" in my mind has more to do with whether you come up with appropriate incentives for yourself. I can't think of any reason you couldn't tie a portion of your bonus or defined equity incentive to meeting some goals you and the PM share...seems like it should be easy to come up with win-wins here. Tie it to AUM, hiring goals, systems implementation, returns...whatever makes the most sense.

If the concern is you set up all the systems and then don't get paid and get forced out...well, do you trust the guy you'd be working for or not?

Where you should get some competent legal advice is around what you need to have contractually promised to you versus relying on the good word/faith of your new boss. Some degree of trust is likely going to be necessary though.

May 30, 2012

Thanks for the reply tempaccount. I don't trust anyone, and especially not anyone that has worked in this business for a long time. People on this site (and in general) often think that if you just add value, you will be compensated. I used to think that way also. The fact is that a lot of shitheads in this business are happy to accept the upside / value add you bring, but are incredibly cheap with the payouts and would rather let you go than actually pay you what you deserve. So your point about "if not, then leave" falls on deaf ears with me. How about just not taking the job unless it's going to pay (for performance, obviously)? I'm not criticizing you, just saying that a miss like that would be expensive and time consuming for me personally, is a horrible move on a risk adjusted basis (as I could easily fail in this role both for reasons related to me and reasons not related to me such as the economy), and because if I take the job, I will be relocating. So no, it has to pay HUGE for me to take the job. And since I am coming from a top 3 firm in the particular type of strategy being discussed, I think I have huge leverage. If they want to get rich together, that's great, but there is zero chance I am making them rich "for the experience."

So my question was more, what is a fair payout to the PM -- obviously you structure for performance, but within what range? It seems that $150-200K is roughly the range of base salary at most shops, and I would probably be fine with $150. But what is the bonus payout? Is it 15-20% of the incentive fee (as I have read in some places)? I also read a compensation report today that said it could be as high as 30-50% depending upon the structure of the firm and what the PM brings to the table.

In this case, I would be bringing some proprietary data systems and screens that I developed (which are free of NDA from my current employer), deep industry knowledge of several industries, a rolodex of small cap contacts and trading relationships, a good track record, and a willingness to work 6-7 days a week and generally bust ass to build this profit center from basically scratch (and I have experience doing something similar already). So this is not a plug and play situation. I personally think 30% sounds fair (50% is way too high because it's not like I have an extensive track record already). If it were plug and play, sure, maybe 15%. But I am not growing someone's business from scratch for a small cut. All they really bring to the table is capital and a basic infrastructure of legal and compliance resources.

So basically 30% of the 20% management fee is what I'm going to propose and see where we go from there. I doubt they will laugh me out of the room based on everything I am offering, but we'll see. I'd rather start high than potentially low ball myself.

Jun 1, 2012

If you're building the product essentially from grounds up, chances are you're making a name for yourself every time institutional investors and their consultants come in to grill you about your strategy. If your strategy really works, then your entire team will potentially be lifted out by another shop if you're unsatisfied with the pay arrangement.

$150k base seems a bit low for a PM leading a product IMO. $180k~$225k seem more likely. As for bonus, I think every fund does it differently. Please update once you have the deal in hand.

    • 1
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Jun 2, 2012

PM-ed you.

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Jun 2, 2012

You should be getting a % of your annual incentive fee plus a modest (relatively) base salary for 180-200k as a PM with something like $50MM under. I'd guess that for an "entry-level" PM you might get something like 30-35%, so if you returned 10% on your $50MM, the firm would take 20% of that $5MM, or $1MM, and you would get 30-35% of that, or 300-350k. As your AUM gets bigger your piece of the pie gets bigger obviously. $50MM doesn't feel like as much as it used to though, and you could be making more than the all-in 500-550k you'd get at that rate right now, but the ceiling is much higher.

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Jun 2, 2012

I am a PM at a hedge fund and you shjuld be getting a small base and a percentage of your trading profits. Standard in macro at a large fund is 10-20% of total PnL. In my opinion if you arent getting a straight % payout and your bonus is discretionary then you arent really a portfolio manager regardless of what the job titlw says...you are an analyst getting paid to help run someone else's money.

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Jun 3, 2012

When you say 10-20%, do you mean that as a % of incentive fees or the actual P&L. I keep hearing different versions of this, and to complicate things further, the number ranges from 5%-60%. For example say your number is 10%, portfolio = 100mm, 10% return, 2/20 fees, do you earn 200k or 1mm? Big difference. If in fact you manage 100mm, is that your gross/notional exposure? That makes sense for equities or hy/corp debt perhaps but for futures/bonds/cds/fx that depends on leverage how is this calculated and what sort of of leverage limits are typically in place? Do you pay for analysts, systems, traders, compliance, other costs out of your 10%?
I agree with you about the PM vs Analyst comment. How do you suggest that one go about transitioning to a PM role? Assuming it's not an option currently available to one (i.e. getting a fixed P&L payout or a partnership in the profits), how could you possibly go to a potential new employer without an official track record? Is it beneficial to somehow get your name on the fund documents as an investment analyst or assistant or junior PM or something like that?

Bondarb:

I am a PM at a hedge fund and you shjuld be getting a small base and a percentage of your trading profits. Standard in macro at a large fund is 10-20% of total PnL. In my opinion if you arent getting a straight % payout and your bonus is discretionary then you arent really a portfolio manager regardless of what the job titlw says...you are an analyst getting paid to help run someone else's money.

Jun 2, 2012
MacroTrader:

When you say 10-20%, do you mean that as a % of incentive fees or the actual P&L. I keep hearing different versions of this, and to complicate things further, the number ranges from 5%-60%. For example say your number is 10%, portfolio = 100mm, 10% return, 2/20 fees, do you earn 200k or 1mm? Big difference. If in fact you manage 100mm, is that your gross/notional exposure? That makes sense for equities or hy/corp debt perhaps but for futures/bonds/cds/fx that depends on leverage how is this calculated and what sort of of leverage limits are typically in place? Do you pay for analysts, systems, traders, compliance, other costs out of your 10%?

I agree with you about the PM vs Analyst comment. How do you suggest that one go about transitioning to a PM role? Assuming it's not an option currently available to one (i.e. getting a fixed P&L payout or a partnership in the profits), how could you possibly go to a potential new employer without an official track record? Is it beneficial to somehow get your name on the fund documents as an investment analyst or assistant or junior PM or something like that?

Bondarb:

I am a PM at a hedge fund and you shjuld be getting a small base and a percentage of your trading profits. Standard in macro at a large fund is 10-20% of total PnL. In my opinion if you arent getting a straight % payout and your bonus is discretionary then you arent really a portfolio manager regardless of what the job titlw says...you are an analyst getting paid to help run someone else's money.

I mean 10-20% of your net PnL...not incentive fee. If I make 10mm in PnL trading net of commissions then I get 1-2MM pre-tax..

May 30, 2012

Thanks guys, SBs for you. Got the offer over the weekend, but there are a couple of issues that would need to be worked out before I could accept. Will update once the final verdict is in.

May 31, 2012

Congrats, Ravenous, and I hope the guy's not a shithead!

May 30, 2012

Update:

Got the offer, could not reach an agreement on the terms and I declined the offer. I do appreciate everyone's help though -- very informative.

May 30, 2012

curious and a dumb question, but if you can pull that much committed capital, can you just start your own fund?

If the glove don't fit, you must acquit!

May 30, 2012

Maybe, it's an option. The capital was not committed to me. It was committed to the firm I was interviewing with and run by the founder. He is legitimately looking to step aside in a few years and wants to find someone to work into the role and hand the book over to. That's all fine and good. But we couldn't reach any agreement on money, and he was jerking me around. At the end of the day, there is always a "story" but the money is what matters.

To answer your question though, I could raise a few million dollars most likely, but that's a pretty tough road to go unless you have some kind of infrastructure to plug into. I guess I could try to stay where I am at, but the point is I am trying to get out of this firm, not marry it.

May 30, 2012

Well I wish you the best of luck, you'll find the right environment shortly. Let me know if you need help with any boring compliance stuff or would like to come to Florida, I could see if some around here would like a PM.

If the glove don't fit, you must acquit!

May 30, 2012
WalMartShopper:

Well I wish you the best of luck, you'll find the right environment shortly. Let me know if you need help with any boring compliance stuff or would like to come to Florida, I could see if some around here would like a PM.

Thanks. I would consider relocating anywhere (Florida is definitely nice). Doesn't have to be a full PM role, I would take analyst / junior PM / PM depending on the fit. This other role I was interviewing for would have been a big step up for me and I know one of the major reasons I was considered for it is that it's in a non-financial city and they were looking for a local candidate with deep ties for a long-term commitment (I lived in that city for over two decades). I couldn't meet their needs for what they were offering to pay, so no go, but I would definitely be interested in any attractive roles almost anywhere in the country.

May 31, 2012

Have to say, I'm kinda curious what kind of comp you turned down. What sort of incentive structure were they suggesting?

Jun 7, 2012

this is a pretty balling decision to have to make dont lose too much sleep

Oct 21, 2014
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Oct 21, 2014