Portfolio Manager offer
Hi all, I've just received a PM offer from a boutique but respected and well-capitalized MM fund. I'm trying to figure out whether to take it / what to negotiate. I'm coming from the quant asset management side so I don't have a lot of perspective on these sort of terms. Here they are:
- Salary: 250k
- First year guarantee: 750k treated as a draw on 2022 payout
- Payout: 12% for Sharpe 1 and below, up to 17% for Sharpe 2 and above
- All expenses 'above the line' except my salary, simple carryforward of losses, good ramp-up and risk limits
- 6m non-compete, no retention of IP
What do you think?
A bit hard to say which pieces to negotiate and whether or not it is a good deal without knowing some of your current situation and some more details. My quick thoughts/questions:
1) base salary is pretty good, at or above what I’ve seen and heard of at some MMs (of course depending on your experience)
2) % of PnL seems fine (potentially a place to negotiate closer to 15%), but is it fixed and binary? Unclear from what you wrote what happens in the middle (you have 1 and below and 2 and above)? Is 1.9 a “1”? If so that seems odd. Also I’m assuming you have agreed on how that is measured (and whether they take into account other measures).
3) drawdown limits?
4) AUM you manage?
5) do you current run any PnL and how is your ratio?
6) what size team do you think you’ll need? Assuming data costs are covered (couldn’t tell from what you wrote)?
7) will they let you run any strategy/assets? Does your current expertise work with what they are limiting you to (if anything)?
8) oh and that non compete is pretty standard
I’m guessing right now you have a higher fixed comp, so it would be about betting on yourself (especially after year 1 where $250k is pretty low compared to “quant” roles) and with that you want to know what risk you can take, how much AUM you manage, make sure you have a good accounting of the costs, and your ability to produce the returns.
2) The %PnL is a straight line interpolation between Sharpes of 1 and 2, so it would be a 15% payout at a Sharpe of 1.5.
3) I don't know the exact drawdown limits. What should I ask for here?
4) I expect to be able to handle a few hundred million per side once the system is up and running. I don't want to assume huge capacity, but the strategies I've worked on in the past have been fine on that front.
5) I'm coming from a team setting where I don't have a personal PnL (think Two Sigma). The ratios of the products I work on are generally in the neighborhood of 2.
6) I'd like to hire a junior researcher/dev pretty quickly and maybe another one when I have my feet under me. Team comp is an above-the-line cost. Is the best way to pay for early hiring to frame it as an advance against future PnL?
7) The opportunity set in terms of assets etc. is pretty well aligned with what I'd like to run.
Thank you very much for any ideas --
Here are my thoughts:
1) drawdowns: I would want to know what AUM I would be starting with, how it gets cut with drawdowns, and at what point they would kick you out. If I were you I would look at my strategies against that to make sure I’m comfortable with potentially taking a 50% hit to AUM and therefore hurting my payout.
2) on PnL: I would look at best and worst case scenarios. Are you saying you will have ~$400-500mm? At 3% you have $15mm, deduct expenses and take 12% (or a bit more) and that’s what you are left with - are you comfortable with these numbers? What about at 2%? Etc. just get a sense for what you’ll be bringing home
3) strategy: make sure you are not only aligned on asset mix but also any restrictions (market neutral, any factor exposure restrictions, etc). It is important to make sure your strategies will work under their restrictions.
4) definitely negotiate the guarantee as a draw on 2022. I’ve seen guarantees before and they are usually just a floor on the bonus, not just shuffling money around.
What does "draw on 2022 payout" mean? $ X k subtracted is subtracted from the 2022 bonus?
That's right, so it winds up working like an advance against the next year's comp. This is obviously not my favorite since doesn't mean extra money in my pocket. I wonder if this is common or something I should push back against.
I will reply to your other questions, but that is something I would negotiate, the guarantees should not be a draw on your future comp
Is the first year guarantee 750 bonus so 1m total comp or 750 all in?
250k salary plus 750k guarantee, so 1M total
Was the guarantee to make you whole on deferred comp? Or more for covering the sit out period?
Would you have deferred comp in current structure? Worth negotiating if possible
My first impressions are that this is a pretty good offer. I think the only point I would try to negotiate is the payout percentage, because let's be real - realizing a 2+ sharpe consistently on real scale is pretty friggin hard. If you are coming from a more collaborative quant set up, I highly doubt you will be able replicate the performance of the strategies you worked on before by yourself. At a MM, a Sharpe 1 is amazing, so I would try to get that 12% closer to 15% and not worry about the Sharpe scaling
Just out of curiosity, how many years of experience do you have? Also, did you throw out the total 750k guarantee number first? Or was this the base offer they gave you without any initial negotiation?
That makes a lot of sense. I have about 10 years of experience in quant research, but I haven't run my own book. The guarantee is something they came up with. I wouldn't be giving up deferred or anything like that, but I also have an offer for a discretionary bonus role with a really big guarantee. I think this part of their offer comes from a desire to be in some way comparable with that. (Also maybe because there's a headhunter in the mix, and I think his fee is related to my first-year comp.) More money is better of course, but I just want to make sure I get the best possible deal overall and avoid suboptimal terms that I would kick myself for down the road.
You're in an interesting position. I'd think long and hard about whether you want to go down the MM path - I can tell you from experience that running a solo book is very different from being a part of a collaborative team. If you've never run an independent book before, you should be honest and ask yourself whether you are being set up for success at a MM. Yes the headline percentage payout numbers are enticing, and you can certainly make multiples of your comp that you would at a collaborative quant fund if you are successful, but the sad reality is that most people fail.
If you have guaranteed 7 figure discretionary comp at a non platform, I'd guess you'd be coming in at a fairly senior level with direct management responsibilities in an already profitable business. Very different from having to build everything from scratch, dealing with broker connections, data feeds etc. and having risk breathe down your back every time you have a drawdown. There's always the chance of blowing it out of the water at MM, but given another strong offer it's worth carefully thinking it over.
Bruh take the offer.
Subscribing
Curious. How long-ish have you been working the in the industry? What's your backround/how did you get to where you are now?
I have a PhD in a technical field. I've been climbing the research ladder at a team-oriented quant shop for about ten years. I make just a bit into the seven figures now and I like what I do, but my shop isn't growing, it feels like many of my senior coworkers are sort of on autopilot, and I think my future progression will be all about politics and waiting for people above me to retire or blow up. I've also received a research group offer for about twice my current comp at a big, excellent HF. However I've had it in mind for some time that I'd either like to start my own entity or be a PM at a MM, and this seems like a good opportunity.
If you are at 7 figures and have an offer for twice that (if I’m understanding this correctly) that is a better route, unless you are really looking for upside. With the AUM you quoted and payout, seems unlikely that you’ll make much more than that (and chances are you make less or get blown out). Additionally that guarantee is pretty bad if that’s where you are right now (in terms of comp).
I've worked at a MM and have many friends working at alpha factories. My 2c:
1. your base is pretty good. Standard base is probably $150k
2. your payout treated as a draw on 2022 is not as nice. If you move from say 2s to MLP, you're probably forefeiting some deferred comp. In any case, your personal bonuses for the year of 2021 are definitely going to be forefeited, but you probably won't actually have your team set up to trade until the tail end of 2021. If possible, you should just get this changed to a straight signing bonus calibrated on your prev year's bonus at your last job.
3. The payout % seems reasonable (standard is 10-20%). You should look harder into the definition of "sharpe ratio" in your contract. Is the vol monthly, quarterly, daily, 5m? Is it gross or net returns? Is the interest rate calculated with FF, zero or the fund's internal funding rate? All of this can shave or add important marginal amounts to your PnL. Also what happens if you achieve a sharpe of 0.5 but earn a bunch of money?
4. What is the treatment for your team's salary and bonus (probably same as yours)? You will have to pay people a substantial cut of PnL: at my last job during the one year we made $, my PM reserved 30% of the bonus pool for the analysts.
Final thoughts: if you have a 7 figure job at a 2s kind of place, I would really think long and hard before taking this offer. Your signals at the alpha factory probably won't make as much money when you move because: you're now competing with your old firm, conditional on being hired your past performance was luckier than average, at a MM you can't draw on the infrastructure and support you used to have. Also dealing with drawdowns and the threat of having your AUM halved forces you to trade differently with much less risk.
As a margin of safety, I would take your expected sharpe, divide by 2, subtract out your costs, then ask if you can support a team of 3 people on your trading revenue. If the move still makes sense then go for it. Just keep in mind your "average compensation" for being a MM PM is going to be skewed to the upside by the few times you earn a shit ton of money, but " average length of tenure" will be skewed towards the downside for the times you get blown out in year 1 of trading.
Curious to see how u would characterize a “boutique but respected” MM?
In my experience, places that have been running quant/hft/etc forever tend to have better infra/data/execution and other resources for that type of strat, simply by virtue of doing it for longer. Starting off at even a minor disadvantage does increase ur risk especially in the beginning.
If one filters by years in the business, the list of viable places narrows down pretty quickly.
I think for someone who has never ran their own book before, these terms are more than fair.
I wonder what are the requirements for this role?
being a hardo
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