Posts by author:

The Volcker Rule is a specific section in the Dodd-Frank Wall Street Reform and Consumer Protection Act that prohibits proprietary trading by United States Banks and restricts these banks from sponsoring or investing in hedge funds. Banks will have to fully comply with the Volcker Rule by July 21, 2014 and this is impacting the career path of investment professionals.

Triple-effect crippling bank traders

Banks are also adapting to the higher capital requirements mandated by the Bank for International Settlements, Basel and global economic slowdown fueled by Europe’s sovereign debt-crisis. Thus the triple-effect of Basel requirements, global economic slowdown and Volcker Rule has hampered larger banks’ ability to allocate capital to their trading desks. This has vastly reduced the risk taking ability of their traders.

Exit of high profile bankers

These developments have accelerated the exit of many of the high profile investment bankers. These bankers now see better opportunities at hedge funds that seek to profit in markets where bank lenders are retreating. Thus a new trend has emerged — high profile Wall Street bankers are now looking for opportunities in hedge funds which are not as regulated as banks.

Lower cash bonus at banks

Since last year, the cash bonuses payable by larger banks have been capped. It has been reported that the cash bonus at Barclays, UK is capped at 105,000 USD (65,000 GBP), while at Bank of America it is pegged at 150,000 USD. Similarly the cash bonus limit at Deutsche Bank, Frankfurt is 131,000 USD (100,000Euros), while at Morgan Stanley, New York it is restricted to 125,000 USD.

Larger bonus to Hedge Funds Traders

According to Options Group, the New York executive recruiting firm, hedge funds are now offering managing director level trader salaries of about 200,000 USD to 250,000 USD.

Unlike banks, the hedge funds typically pay 50 percent or more of bonuses to their highest earners in cash, opines Johnson Associates, a leading New York-based compensation consulting firm.

According to a recent online survey conducted by, employees at largest investment banks have got an average salary hike of only 3 percent last year, while smaller investment banks and fund managers were respectively paid 14 percent and 13 percent higher.

Better career opportunities

During the first quarter of 2012, investors have allocated over 16 billion USD into hedge funds with the total capital invested in the global hedge funds industry galloped to a record 2.13 trillion USD.

Though Wall Street banks previously offered greater job security and higher volume of business, the recent developments have hampered their growth and bonus pay-out potential. Hence it has become a buyer’s market for hedge funds and the people working in hedge funds have now figured out how to trade in the new world.

A great opportunity has been thrown open to hedge fund professionals due to (a) change in the banks’ regulatory landscape, (b) uptrend in the interest shown by investors in hedge funds and (c) increased pay-package in the hedge funds industry. This exodus of high-profile Wall Street bankers heading to hedge funds seeking better career opportunities is likely to continue.

{ Comments on this entry are closed }

Another change looms for the hedge fund industry: compensation structures that could make hedge funds more “investor friendly.” Institutional investors are already rewriting the rules, and wealthy investors and family offices are sure to follow.

The traditional hedge fund compensation structure has been “2 and 20”. A 2% management fee on assets under management (AUM) and 20% of the profits above an agreed-upon benchmark. Some of the top stars in the industry have even been known to charge 3/30 or higher.

But in today’s tough fundraising environment, many new funds are compromising on 2/20 in order to attract new investors. Here are some examples of the newer compensation schemes:

– Simple 1.5/15 or even 1/10 (for some separately managed accounts).

– 20% incentive compensation, but only if the return is above 8%.

– 20% incentive fee, but paid only when life-to-date realized P&L reaches a certain percentage of the total P&L. This incents the manager to turn inventory and stay liquid.

– 20% compensation, but 10% gets deferred for 3 years. This structure may have a “claw-back” provision that allows investors to recoup some of the earlier fees if the fund is down significantly.

– 20% compensation, but 15% gets invested in the fund with a lock-up (a period during which an investor can not redeem), and for which for the manager’s money is one year longer than the investors’ lockup.

– 2% management fees, but a portion gets put into an escrow account to be used to retain talent when the fund is down significantly, or to retain the team if the fund needs to be liquidated (or if redemptions are suspended).

– 2% management fee, but all operating expenses are disclosed and anything that hasn’t been spent gets distributed back to investors. This is usually a temporary scheme by a “seed” investor.

– 2/20 for investors under $25 MM, 2/15 for investors between $25 and $50MM, 1.5/15 for investors over $50 MM or seed investors. This type of structure is not new, particularly for seed investors, but it will become more common now.

– 2/20 for investors with quarterly liquidity, 1.5/20 for investors with a one-year lock-up, 1.5/15 for investors with a 2-year lockup.

Many of the new schemes are structured to give those who are serious partners of the fund a break on fees, and to provide certain protections, to better align the interests of managers with that of the investors.

Today, even some of the more established hedge funds are being asked to adjust their fees to keep existing investors happy or to raise new money. This development should create a more stable investor/manager relationship, with investors taking a more active role.

What’s your opinion? Is your firm adjusting compensation rates as well? Add your comments below.

{ Comments on this entry are closed }

A Hot Hedge Fund Job Niche

October 18, 2010

Bonuses for the IT staff at hedge funds have doubled in the past year, despite the troubles affecting the overall sector, reports Network World. Hedge fund IT staff can expect bonuses in the 50 percent plus range, which is nearly double the 25 to 30 percent bonuses they received last year, according to data compiled […]

Read the full article →

Hedge Fund Manager among the World’s Youngest Billionaires

October 11, 2010

Hedge fund manager John Arnold, 36, made the list of Forbes Magazine’s youngest billionaires, with a net worth of $4 billion. Surprisingly, that only put him at number 212 on a list of 937 billionaires worldwide. Arnold started as an oil trader for Enron in the 1990s. When Enron collapsed, he founded Centaurus Advisors, LLC, […]

Read the full article →

How Hedge Funds Lure Proprietary Traders

October 4, 2010

The passage of the Volcker Rule in July is having its effect on hedge funds. The Volcker Rule limits banks from making risky bets with their own capital and from investing more than 3 percent of assets into hedge funds or private equity firms. There’s already been talk that major banks such as Goldman Sachs […]

Read the full article →

From Farmer’s Daughter to Hedge Fund Manager

September 27, 2010

You may not think being a farmer is a natural starting point for having a hedge fund job or running a hedge fund. But when you consider today’s volatile commodity markets, you may change your mind. Renee Haugerud’s father was a corn farmer in a small Minnesota town. Haurgerud says she got bitten by the […]

Read the full article →

Dream Job for New Hedge Fund Managers?

September 20, 2010

Citadel Asset Management, one of the giants in the hedge fund industry with $11 billion under management, has just launched an office in Boston to spawn the next generation of hedge fund managers. Citadel founder, Kenneth Griffin, reportedly got his start investing while at Harvard in the late 1980s. Now he wants to hire investment […]

Read the full article →
Real Time Web Analytics