What is a good PNL for MM PM in a year?
Say you are a PM at a MM platform, running approximately 100M/100M long/short book. Typically what's a good enough PNL over a year that you would be expected to generate (and from which you get paid your bonus)? How much PNL do the best PMs make and the average ones? What's a good enough sharpe ratio?
~3% on GMV is considered good/decent; 5% is very good; HSD+% is only done consistently by MM stars (woodruff for example). The tough part is pulling these returns consistently. Also depends on platform - a 3% at GE will be harder than P72 given every risk factor is tighter and book sizes are larger.
more cynical take: anything above 1% to justify your existence
This is fully accurate.
So 3% on GMV means if I am 100M long 100M short (200M gross), then 6M of profit (3%*200) is a good figure? That doesn't seem very high.
and yet...it is considered good enough. If you're the kind of investor who can generate 3% with $200mm and team of 1 analyst working for you, the biz dev teams will happily give you more money (since the guy who sat next to you did -3% and got fired). So a successful investor like you is soon trading $1bn with 2-3 analysts and a 3% year starts to become more meaningful.
It is considered good enough because of how hard it is to generate this return within the risk parameters. Go too hard on momentum long/value short and the risk teams will call you up to warn you. One rotation can wipe you out or wipe out someone with a bigger book and lead to cascading effects on everyone (since most people are generally long the same good/short badcos). You could literally see this happen in January.
also remember that you are levered
This would be a tiny/starter PM book size in most asset classes at the big players...
Average ones lose money. Ok ones make between 5-10mm / yr. This is enough to not get fired. Best ones are clearing 25mm+
When you say "make" does that mean gross profit the manager makes for the fund or is it how much they get to distribute to their team? If gross profit, does the PM get ~20% to allocate?
Yes gross PnL - take home is typically less than 20% after fees. Probably closer to 15%
You're quoting the gross P&L right? So on a $500MM GMV book you made 3% = $15MM P&L.
Then the PM takes a percentage of the gross P&L somewhere in the 15% to 20+% (if you got good terms). So using 20% as a round number the PM would earn $3MM.
Then you deduct any "below the line" expenses such as discretionary bonuses for analysts and your trader and that is the net take home pay for the PM.
Lastly, you typically have some sort of deferred compensation scheme so not all of it is earned in year 1.
This is all a bit optimistic, though not wildly wrong. In a very good year / with a very good pm you'll make 3%. The above the line expenses are negligible (base salary for 4 people). The take on most MMs is 15% so you've got 2.25MM to distribute. Your senior analyst needs to get 600k or else he jumps and takes half of your process to a PM seat at ExodusPoint. You don't want to get a stingy rep so you toss each of your jr analysts 150k. You're left with 1.35 MM - a good payday, but not life altering with fed/state/city taxes. Go back and do it again a few more times with increasing allocation and you'll have enough money and rep to try striking out on your own. You'll get like a bill or two in seed money from people at institutions you've met along the way. They'll fuck you on terms though, so you're making less money than you did as a pod, unless you decide to nut up and take more factor risk than Millennium was letting you. If you crush it for another couple of years and have good luck with no factor rotations then you have a good amount of non seed money that's paying you full ride 2&20, and you're raking in low 8 figs a year. Ride the bull as long as you can and you'll be 40 with a low 9 figure net worth.
Or, anything goes wrong on that path and you're like the rest of us grinding out a buck a year until you can retire at 50 with 10-20MM and kids who barely recognize their absentee father.
It's barely worth it until you look at the shit jobs everybody else has.
10mm a head for a team
Why is 3% considered a good return?
Add leverage. Many MM are levered up. So the 3% will get increased via the leverage.
On top of that, many MMs will also have a center book replicating the PM's positions or trading off his alpha tracker signals. Which again amplifies that 3% return.
Leverage is a crutch to increase buypower when original (pre-GMV) equity is insufficient to carry whatever the notional exposure needed to drive PnL. Risk is risk regardless of collateral utility, so those who utilize their cap efficiently (through inherently levered products like derivs, for instance) are pound-for-pound better traders, provided they produce same return as those using prime broker leverage.
Eg, a $15M stat arb fund levered intraday 10x (150M GMV) which carries 3k×3k l/s pairs using underlying spot needs that extra BP cause cash shares lock up more notional than total fund equity, to produce 50% annually ($7.5M). However, if they didn't have access to 10x leverage to carry necessary positions their return would only be 5% ($750k).
Contrast that w/ a strat that drives 50 bps avg daily ROE (annualizes to 125%) using under 10% of actual equity, 90% in cash sweep interest bearing vehicles. Effectively, the returns are 1250% @ roughly full capacity (100% margin/equity ratio) if the fund returned 90% idle capital to investors.
It is 3% on leveraged exposure. MMs are leveraged anywhere from 5 - 10x so that translate to around a roc of 15 - 30%.
But what about the cost of the leverage? It’s not free right
less than a bank cd rate
Here's an interesting data point: to be a top 10 team at BAM this past year you had to put up $70m of P&L. Even if you assume the average book is $1bn (which I think is large) that's a pretty good % of GMV .
Source: friend is a pm there.
The more interesting point is that the top 10 teams accounted for over half the firm pnl. BAM started the yr around 6bn so 30% would be 1.8bn of PnL.
If 70m was required to crack the top 10 then those top 10 probably contributed around 900mm-1bn of PnL. BAM has over 100 PMs and also runs a large alpha capture book. Therefore, seems like the majority of the other 90 PMs contribute no value (net each other out). This is not that dissimilar to other MM
Great point
That is probably true everywhere. 80-20 rule applies in every industry. In hedge funds I think it is more like 90-10, where 90% of returns are made by the top 10% and bottom 10% are probably cut.
I believe BAM have about 60 teams in 2020. Therefore, if we assume a normal distribution, about 16%*60 = 9.6 teams should have a >1 standard deviation return.
If we assume BAM returns 15% annually with a Sharpe ratio of 2 and 60 uncorrelated pods. Therefore, the average pod’s Sharpe is ~0.25 and +1 SD return with the mean at 3% is 15% return. Therefore 9.6 teams should have a >15% return.
The fund is ~$9B, from Bloomberg, with 5x leverage means $750mm per team. Therefore 9.6 teams should generate 15%*750 = $112.5mm based on pure randomness.
I love the example of using a ~N to illustrate this example is a good approach but this assumes that pods are running a std deviation of ~12%. This is far far too high, the std deviation should be max 5%. No pod is going to run a strategy with a 50% chance of being blown out every .4 std dev event.
also don’t think BAM enhanced is set for 15%, think it’s closer to 10% expected return.
If you use the BAM’s 15% fund level return for the 9.6 team in ur calculation, it would be 3% return on the allocated gross GMV of $750 as 750 is already 5x levered allocation to each team. In other words, the 9.6 team would each generate more than 3%*750mm = 22.5mm+ based on ur reasoning. Obviously these numbers r bit low for the top 9.6 teams as both GMV managed and actual gross return on GMV would be significantly higher for the top teams
This is really interesting, any data from other managers? And yet everyone thinks they are top 10th percentile talent wise
The average person believes they’re above average in every aspect of life.
200m book is very small
skewed economics designed to mask underperformance & inefficient capital utility,
Weed out inefficient capital hoarding leverage junkie underperformers.
$200M fund, using fraction of its equity to drive 10-15% annual returns is plenty.
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