From the point of view of compensation, working at a hedge fund can be very attractive, to put it mildly. The traditional “2 and 20” compensation scheme for the firm itself, meaning 2 percent annual management fees plus 20 percent of profits, enables hedge funds to pay their staff handsomely. Some very profitable hedge fund managers have taken an even larger cut of the profits. However, as we’ll discuss in a moment, the days of 2 and 20 may be drawing to a close.
In terms of individual compensation, some top-tier hedge funds have been known to pay their analysts base salaries in excess of $250,000, plus incentives for fund performance. It is not uncommon to hear of top traders making more than $500,000 a year in base salary.
The 2008 Hedge Fund Jobs Digest Compensation Report looked at salary trends in depth. The report is based on compensation data collected directly from hundreds of Portfolio Managers and employees from firms, both large and small, such as Bank of New York Mellon, Barclays Global Investors, Citigroup, Fountain Advisors LLC, HSBC, Kellogg Capital Group, Lansdowne Partners and many others.
The average cash compensation for hedge fund jobs was US$260,000 in 2008. The report reveals three primary drivers of hedge fund compensation: experience, the performance of the fund, and the size of the fund overall. Regarding fund size, bigger is not necessarily better. Although the hedge fund industry is often referred to as a meritocracy, many respondents to the survey indicated their bonus is disconnected from their individual performance and, instead based on overall firm performance.
However, the report also showed that larger funds, in the $500 million to $1 billion range generally pay the best. Small funds often struggle to reach a critical mass that allows them to cover a large salary pool.
Next time we’ll look at compensation figures for 2009, along with the stratospheric salaries earned by the world’s top hedge fund managers.