In most professional environs, back to back years of meager performance, are likely to raise serious job security concerns among employees. However, among hedge fund professionals, this passes as faulty logic.

Fig 35 - Job Security 2016According to the 2016 Hedge Fund Compensation Report, a meager 8 percent of hedge fund professionals participating in the survey identified as being very concerned about job security. Equally stunning is the fact that 48 percent of respondents do not view job security as a concern of any magnitude. The remaining 44 percent acknowledges being somewhat concerned.

Really…Only Somewhat Concerned?

This statistic is clear evidence of the supremely confident mindset of the hedge fund professional.

Despite real fund performance issues, constant assaults on management and performance fees, mindless income tax rate comparisons, formidable regulatory pressures and daily doses of unflattering media coverage, most hedge fund professionals (92 percent) are confident in their value to their respective firms.

Job Security vs. Job Satisfaction

Many will expect to see a strong correlation between job security and job satisfaction. However, the aforementioned Compensation Report reveals quite the opposite. Although 92 percent of the survey’s respondents were largely positive with respect to their job security, 56 percent of these hedge fund professionals define themselves as unhappy with their level of compensation.

What’s in the Cards for 2016?

First quarter returns for hedge funds, in the aggregate, are in negative territory. Troubling as this may be, even more troubling is the fact that the New York City Employees Retirement System (NYCERS) has voted to abandon hedge funds as an investment vehicle. Citing the 1.88 percent loss its hedge fund investment experienced last year, NYCERS will redeem $1.45 billion.

The New York City Employees Retirement System’s hedge fund investment is about 2.75 percent of its $53 billion portfolio. Not surprisingly, precious few media reports on the subject acknowledge that hedge fund returns for NYCERS over the past three years averaged a positive 2.83 percent. While this three-year return is hardly the stuff of legend, it does place NYCERS decision in a different light. Even the amateur investor understands the value of a track record in making investment decisions.

Hedge Fund Jobs

While the NYCERS choice is troubling, it is no more significant in its consequences than was the CalPERS decision or more recently, AIG’s redemption announcements. In their totality, it is reasonable to identify this as a trend and the trend is beyond troubling.

The hedge fund industry can and will rationalize these events, dismissing these redemptions as inconsequential in the grand scheme of things. However, they may do so at their peril. While it is true that, as a percentage of assets under management, these redemptions are drops in a barrel, the industry must acknowledge that even a barrel that leaks only “drops” will empty its contents over time.

As anyone following Showtime’s Billions can tell you, there are reasons Bobby Axelrod has a full-time psychiatrist on the payroll.

 

 

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Equity sharing is an important variable to consider in determining the level of total compensation an individual will receive from his hedge fund firm. While equity or upside sharing is not a topic typically perceived as applicable to those just beginning a career in the hedge fund field, it ultimately becomes incredibly important to the overall earnings trajectory of every hedge fund professional.

What Is Equity Sharing?

Upside sharing, a term often used in the hedge fund industry is difficult to explain definitively. The 2016 Hedge Fund Compensation Report explains upside sharing in greater detail, and includes survey data acquired from participating hedge fund professionals. In the space allotted here, it is sufficient to say that each hedge fund’s approach to equity or upside sharing is unique and no established model for upside sharing exists, although they do share some commonalities.

It is important to understand that upside sharing is different than bonus pay. Equity sharing is frosting on the bonus cake. Because performance fees are the source of funds for equity sharing, a fund that underperforms will not produce the revenue needed to pay out equity shares. Consequently, upside sharing is the carrot of choice to dangle before the hungry mouths of those in the firm who have the greatest responsibility for making investment decisions.

Who Benefits from Equity Sharing?

Of course, those receiving an equity share benefit financially, but, in truth, the hedge fund’s investors are the supreme beneficiaries, because the practice incentivizes prudent investment decisions. Additionally, upside sharing ensures the stability of the investment team. This is extremely important to hedge fund firms and investors because, turnover and instability can impact hedge fund returns as much as deficiencies in skill and experience.

Who Gets an Equity Share?

According to the previously referenced report, 75 percent of hedge fund professionals do not receive an equity share. Of the remaining 25 percent, more than one-half receives an equity share of less than two percent. Only six percent receive an equity share greater than 10 percent. Clearly, nothing says “you’ve made it” in quite the same way as garnering an equity share.

As mentioned earlier, those breathing this rarefied air are typically those shouldering the most responsibility for the firm’s investment decisions. Leading the pack is the Chief Investment Officer, Partner/Principal and Managing Director. Work experience also plays a significant role. For example, of those with more than 20 years of experience, only 40 percent receive an equity share.

Closing Thoughts

While upside sharing may not be of immediate concern for hedge fund novices, it is an integral component of hedge fund compensation and becomes increasingly important as one’s career progresses. It should be apparent that a hedge fund firm’s upside sharing policies and practices can provide valuable insights regarding many aspects of the firm, not the least of which is the value a firm places in its investors and employees.

The question begging an answer is whether declining equity participation is driving poor performance or, is poor performance driving the shrinking number of hedge fund professionals receiving an upside share.

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