Hedge funds begin a new year on the heels of a performance record  not matched since 2013. Gains will undoubtedly reach 8 percent or better, and assets under management stand at an all-time high.

While these statistics are inspiring, the question on the lips of the aspiring hedge fund professional is what does this mean for bonus and base pay? The best source for answers is the 2018 Hedge Fund Compensation Report.

Base Pay

According to the report, an average $0.38 of each dollar in compensation paid to hedge fund professionals came in the form of base pay, down from $0.41 last year. However, the highest earners, those earning in excess of $1 million, relied substantially less on their base pay, with only $0.17 of every dollar in total compensation coming in the form of base pay. In sharp contrast, those on the lowest rung of the earnings ladder saw base pay account for $0.76 of every dollar earned.

Bonus Pay

The principal driver for bonus pay is performance. Said performance may be defined as personal performance, fund performance, firm performance or a combination of any of the above. These variables make a direct comparison of one’s total compensation to the overall industry’s performance impossible. For this reason, one of the Hedge Fund Compensation Report segments displays results based upon fund performance.

As  we see in the breakdown above, bonus expectations for funds with positive gains increase as anticipated gains rise. The obvious exceptions are found with those working in funds that expect to break even or to experience negative gains.

Bonus expectations are lower, but, nonetheless, they are anticipating bonuses. While this result is counter-intuitive to many, one must consider the methodology by which individual firms calculate bonus pay. For example, bonuses that are based on personal performance can be paid regardless of firm or fund performance when those personal benchmarks are met or exceeded.

The takeaway from this graph is that in 2017, bonus expectations for hedge fund professionals whose funds were performing in positive territory were substantially in line with gains.

Other Factors

Only two factors affecting bonus pay and/or total compensation have been analyzed here. There are many other factors, all of which are available in detail in the 2018 Hedge fund Compensation Report. For example, such variables as firm size, fund size, working group size, method of bonus calculation, fund strategy, and equity sharing, to name a few.

What About Hedge Fund Jobs?

The uptick of overall performance, combined with growing assets under management, can only be viewed as a positive for employment opportunities. However, it is essential that hedge fund job seekers optimize their understanding of hedge fund compensation. This enables job seekers to target firms that present the highest compensation opportunities in line with their skills, experience, educational background and expectations.

At the same time, those responsible for hedge fund hiring will benefit from the report by minimizing lost recruiting opportunities. Having access to the detailed information the 2018 Hedge Fund Compensation Report provides, gives hiring managers the facts needed to make competitive job offers.

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It is not possible to allow 2017 to pass into history without acknowledging the achievements the hedge fund industry has made during the year. First, hedge funds made positive gains for investors in each month of 2017. Gains, year-to-date, stand at around 7.5 percent. Of course, December’s results are not final, but almost no one believes this month will be an exception, and month-to-date numbers support a positive outcome. Few will be surprised to see an annual aggregate gain of 8 percent or better. Second, industry assets under management have achieved new record levels of around $3.25 trillion. In short, 2017 has been the industry’s best year since 2013.

Closures vs. New Starts

While there are those in the industry who bemoan the fact that hedge fund closures outpaced starts through 2017, most regard the net loss of hedge fund firms as a positive. Market forces are at work, culling the under performing firms and rewarding those that meet or exceed investor expectations. The fact that investors are rewarding performing firms is evident, because despite the fact that closures outpaced starts in 2017, assets under management continued to increase. One can only conclude that failing firms were not a vote of no confidence in the hedge fund industry, but rather a vote of no confidence in nonperforming hedge fund firms. Further confirmation comes in a recent HFR report, which reports that 2016 saw 1057 hedge funds close compared to729 new starts. Through the first three quarters of 2017, we see 618 liquidations as compared to 545 start-ups. As hedge fund performance improved throughout 2017, the gap between liquidations and starts narrowed. Again, market forces at work!

Carried Interest

Surviving the Tax Cuts and Jobs Act, signed into law by President Trump, well ahead of his, self-imposed Christmas deadline is carried interest. Carried interest, also known as upside sharing or simply “carry” has been a critical component of hedge fund compensation for many, many years. The subject is not an entirely straightforward one, but fortunately, it is beautifully explained in the 2018 Hedge Fund Compensation Report, which is available now.

The hedge fund and private equity industries have likely not heard the last of carried interest. Trump promised to do away with this “loophole” and his critics are already raging at the fact it persists in the current bill.

What About Hedge Fund Jobs?

Regardless of one’s political views, the Tax Cuts and Jobs Act is nothing, if not a catalyst for business investment. Hedge funds, having found their footing in this bull market, are likely to continue to improve their levels of performance. At the same time, investors will have more money to invest. Many will no doubt choose hedge funds, given the performance improvements the industry has demonstrated thus far in 2017.

Higher levels of investment, growth in assets under management and the general business optimism the passage of this bill has engendered, will nurture a very positive climate for hedge fund jobs. If the industry stays on point, 2018 will be an even better year than we see in 2017.

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