It’s tough not to revert to some variation of Sally Field’s infamous speech after winning her best actress Oscar in 1985, particularly when it comes to investors’ take on hedge funds and what they are willing to pay for the privilege of being invested in them.
Indeed, several reports published over the past few weeks on hedge fund compensation all, while each belonging to their respective contexts, point essentially to the same thing: that charging 2 and 20 is alive and well and that investors, particularly institutions, are quite comfortable paying for it – so long as they get what they feel they are entitled to.
What they are expecting is without doubt a lot more than they used to; broadly speaking, it’s more frequent reporting of results, more short-term redemption options and less longer-term capital, which in turn has made private equity-like strategies less favorable among investors. This is the opinion of the 2011 Hedge Fund Compensation Report (click here to download the executive summary).
By extension, compensation expectations have also shifted, both among fund managers and employees working at hedge funds. According to the report, for employees, compensation has become longer duration in nature, and much more private equity-ish – not so much on the base salary side of things but on the bonus side, where historically much of the cash has been made.
Of particular interest is how hedge funds appear to be following in investment banks’ footsteps, that is by raising base salaries and lowering bonus structures, which happened by the hands of new federal bonus compensation regulations. At the same time, fund performance and fund size still predominantly dictate overall compensation, though with guaranteed bonuses still being used as a retention tool. The chart below shows the average compensation at a medium-sized hedge fund, including base salary and bonus, as of the third quarter of this year.
So in what direction is compensation generally going? According to a separate report from Russell Reynolds Associates, things are finally looking up ! The report, entitled “Navigating New Terrain in the Asset and Wealth Management Industry” (click here to download), notes some interesting trends (all positive by the way) including that hedge funds in particular are bringing on more people than traditional asset managers. Additionally, the report reports that compensation is on the rise by as much as 15% in the U.S. and even more so in Canada, Europe and the Asia-Pacific region.
Still, it’s not all rosy. “Given prolonged margin pressure, multi-year guarantees for newly hired executives and investment professionals continued to be the exception,” the report notes, with only a few firms in actual expansion mode while most abide by a “more with less” mantra.
One other key finding: leadership trumps all, as shown by the number of internal promotions into senior executive roles as being dwarfed over leaning to recruiting from outside.
“This will not be the year of the golden goose,” one hedge fund human resources executive told the survey’s authors. This is mostly because returns, though on the mend, still aren’t at levels that would allow for significant addition of personnel or distribution of additional bonuses.
A further point of interest was yet another report from Greenwich Associates, which showed that while compensation in the asset management industry took a broad hit in 2009, hedge funds took it right in the chin, with no real improvement in 2010 and likely not much of a gain in 2011 (click here to download the Greenwich report).
The reason: Hedge fund professionals went into the crisis earning a lot more green than most others. In the fixed-income space, for instance, hedge fund professionals averaged roughly $1 million versus $325,000 at traditional firms in 2007. The gap narrowed a bit post-2008: $1 million for hedge funds versus $475,000 at traditional asset firms. With equity professionals, the pay differential was even more striking – 2.7 times in 2007 narrowing to near parity by 2009.
The two charts below shows average senior investment professional total compensation for both fixed income and equity from 2007 to 2010, including hedge funds, investment managers/mutual funds and all others.
So what’s the moral of the story here? For starters, despite the ups and downs, there is still a lot of money to be made managing money, or at least working for a firm that does. Another clear trend: while more modest than the go-go days of 2007 and before, those who work at hedge funds likely have a better chance of raking in the big bucks, especially if they’re with a mid-sized firm that’s going well.
On the flip side – and somewhat obvious – is the harsh fact that the gravy train screeches to a halt when performance slides and/or when assets start running for the exits.
So yes, they really like us, just like Field trilled – at least today.
(Editor’s Note: While most remember Field’s remarks as quoted above, her actual quote was a bit different: After having won Best Actress at the Oscar’s in 1980 for “Norma Rae”: “I haven’t had an orthodox career, and I’ve wanted more than anything to have your respect. The first time I didn’t feel it, but this time I feel it, and I can’t deny the fact that you like me, right now, you like me!”)