What Was Under Last Year’s Tree for Hedge Fund Professionals?

For 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.