From the category archives:


The suggestion that assets under management are soaring is admittedly a bit Trumpian, but the fact is that the number of hedge funds shrank to 9,803 (including funds of funds) while 2016 industry assets under management climbed to just over $3 trillion according to the HFR Market Microstructure Report.

What Can Be Inferred From the Report?

If the number of hedge funds is shrinking at the same time hedge fund assets under management (AUM) rise, then it stands to reason that those firms remaining are becoming larger. More dollars spread among fewer firms can result in no other outcome.

In January 2017, hedge fund redemption slowed to $5.2 billion, a figure that represents about one-quarter of the outflows suffered in January 2016. Suffered may not be the correct adjective because we must also infer that many of these redeemed funds are being redirected to hedge funds with superior performance metrics. Otherwise, how is the growth of AUM to be rationalized?

How Will This Affect Hedge Fund Compensation?

For insights into the effect of larger firms on hedge fund compensation, we look to the 2017 Hedge Fund Compensation Report.

2016 HF Comp by Firm Size

 As the chart shows, mean compensation begins to trend lower in larger firms, those with fifty or more employees. One can expect investors to redeem from firms that have failed to meet expectations and invest in higher performing firms. However, that does not mean that these investment dollars will necessarily flow to the largest firms. Countless hedge fund firms, with fewer than fifty employees, boast stellar performance records. As a result, they will attract their share of investors.

Nonetheless, as underperformers shutter and the total number of hedge fund firms continues to decrease, the growth of even the smallest firms is all but guaranteed. If the trend toward lower compensation in larger firms, as shown in the chart above, were to continue, then it would be reasonable to speculate that hedge fund compensation overall will undergo a decline.

There are too many factors in play which could impact the industry, therefore it would be irrational to predict this outcome since we know the paradigm in which the above chart exists may be radically different from tomorrow’s.

What Is the Impact on Jobs?

We all understand that swings in assets under management do not necessarily mandate adjustments in staffing, but those who lose their positions because of firm closure could face increased challenges in their quest to gain purchase with another firm.

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2017-hf-comp-rpt-fig-22For starters, around three-quarters of hedge fund professionals will not receive their bonuses until the first quarter of 2017, according to the  Hedge Fund Compensation Report, so, if there was nothing under the tree, no worries, it is coming.

What Will Bonuses Look Like This Year?

Although the financial media has painted a bleak picture of the hedge fund industry, citing underperformance, negative flows and closes that exceed starts, the majority of hedge fund professionals are expecting bonuses this year.

While the average percentage increase in bonus pay is up a paltry 1.5 percent over last year’s bonus payouts, average base pay shows a year-over-year increase of almost 3 percent. To take the mystery out of the equation, expected mean bonuses range from $52,000 to $293,000 and mean base pay ranges from $120,000 to $245,000. With bonuses of that size, most folks likely enjoyed a substantial chunk of holiday cheer.

Bonus Pay vs. Firm Performance

Anyone that has kept pace with hedge fund compensation understands there has been a disconnect evolving over the past four years with regard to performance and bonus. From 2013 forward, the chasm between bonus payouts and firm performance widened. In some cases, bonus payouts to hedge fund professionals working in firms with negative gains were receiving higher bonus payouts than were their peers in firms with above average gains. The reasons for this disconnect are many and too complex to address here. We did see, however, that bonus pay and performance are more closely aligned this year than they have been in the last three.

Bonus Pay vs. Base Pay

Another fact gleaned from this year’s 2017 Hedge Fund Compensation Report is the fact that hedge fund professionals in the lowest paying positions also received the smallest percentage of their total compensation in the form of bonus pay—about 11 percent on average. Conversely, those at the top of the earnings scale received more than 80 percent of their total compensation as bonus pay.

Guaranteed Bonuses

The hedge fund profession is a “put up or shut up” industry. This is reflected by the fact that only one in five hedge fund professionals are guaranteed a bonus. This is consistent with the pay for performance model that has been long touted in the industry, although not always practiced.

What about Jobs?

Take your cue from the optimistic outlook the majority of hedge fund professionals expressed in this report. Hedge funds have struggled in the past four years to be sure. Undoubtedly, there are still challenges ahead but the trends and the facts favor the industry. For example, while it is true that net outflows were negative this year, it is also true that hedge funds, in the aggregate, have $3 trillion plus in assets under management and although closings outpaced starts for the first time in years, it was not by alarming margins. Lastly, the compensation for hedge fund professionals remains the envy of the majority of those working in the financial sector.

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I Got the Offer – Now What?

November 14, 2016

Everyone that breaks into the hedge fund industry asks themselves that question. The education, the experience, the network of contacts, the untold hours spent writing and re-writing resumes/CVs and cover letters, interviews – it ultimately ends with the negotiation of a compensation package. Prior to the finalization of this key hiring element all one has […]

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Equity Shares Shown to Have Declined in 2015

April 4, 2016

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 […]

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The Goldilocks Principle and Your Hedge Fund Career

March 7, 2016

The Goldilocks principle states that something must fall within certain margins, as opposed to reaching extremes. As such, it is often associated with the search for life on other planets and explains the phenomenon of life here on planet Earth. In short, life is possible because Earth is neither too hot nor too cold, nor is […]

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Trump Defies Gravity and So Do Hedge Funds

February 22, 2016

Anyone following the primaries will recognize this phrase, used frequently in the context of Donald Trump’s foray into presidential politics. For example, in the recent South Carolina contest, the phrase was employed ubiquitously by talking heads in the mainstream media, who were largely incredulous regarding the margin of Trump’s victory in the wake of his […]

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What You Need to Know About Hedge Fund Bonuses

February 8, 2016

Bonus pay is a critical segment of one’s total compensation in the financial sector in general and hedge funds in particular. It is not uncommon for those in the highest pay bands to earn bonus pay that is many multiples of their base salary. Predictably, the percentage of one’s total compensation represented by bonus pay […]

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