Hedge fund compensation experienced mixed trends in 2015 as a challenging performance environment in the third quarter offset industry-wide gains from the first three months of the year, according to the 2016 Glocap Compensation Report.
The report, which is published in conjunction with HFR, suggest that volatile Q3 performance will likely contribute to lower bonuses for the most highly compensated, performance-sensitive roles including senior portfolio managers, traders and executives. Partially offsetting this trend, compensation and base salaries for mid- to lower-tiered employees, including analysts, operations and technology, increased in 2015, consistent with broader trends in US employment.
Glocap is a premier executive search firm dedicated to serving the specialised recruiting needs of clients primarily in the alternative investment industry, and HFR is the established global leader in the indexation, analysis and research of the global hedge fund industry.
Compensation and hiring in 2015 has been driven by a number of factors, including individual, fund and firm specific performance dynamics. Total hedge fund industry capital ended Q3 2015 at USD2.87 trillion, reflecting a decline in Q3 from a record of USD2.97 trillion as of mid-year 2015. The HFRI Fund Weighted Composite Index posted a decline of -1.6 per cent YTD through September 2015, and the per centage of funds which had reached their respective performance incentive fee accrual level (or “high watermark”) in the trailing 12 months fell to 53 per cent, from 66 per cent in 2014.
While lower performance will contribute to lower incentive compensation at many of the industry’s most well established funds, this effect will be moderated by improving employment trends in the overall US economy, resulting in increased base salaries across many functional roles.
Entry level analysts at large firms received an average base salary increase of nearly 9 per cent, precipitated by increased compensation for junior bankers. As a result of muted 2015 performance, this is likely to be offset by a bonus decline of 5 per cent, resulting in average annual compensation of USD360,000, though analysts at top performing funds are expected to see compensation gains of nearly 6 per cent.
Average base salaries for Portfolio Managers at mid-sized firms were unchanged for 2015, while declining bonuses are likely to result in an annual compensation decline of between 8 and 11 per cent to USD950,000. PM compensation at top performing, mid-sized funds will be roughly twice the average level of mid-performing funds of the same size.
Senior IT professionals are expected to experience an increase in total compensation of between 5 and 7 per cent, with IT professionals at top tier funds receiving average annual compensation of nearly USD350,000.
Many funds implemented policies to improve alignment of interests, including greater use of deferred compensation and mandatory bonus re-investment. In addition, many firms have increased their interest in and use of diversity policies in 2015.
“Following several years of steady gains, overall industry compensation has been mixed in 2015, varying widely by fund performance, size, seniority, functional role and specific qualities of individual contribution to firm growth and expansion,” says Kenneth J Heinz (pictured), President of HFR. “Compensation structures continue to evolve toward longer-term incentives, greater alignment of interest with investors, and recognising top performing employees for their contribution to firm performance, as well as the significance of supporting operational, management and infrastructure roles. These progressive developments are likely to contribute to individual firm stability and overall industry capital growth, not only into year end, but over multiple years and market cycles.”
“Senior investment analyst compensation is driven by performance; in 2015, weak long-short equity performance will lead to lower year-on-year compensation. Investors following better performing strategies, including market neutral, macro and event-driven, are more optimistic about their compensation outlook,” says Anthony Keizner, Head of the Hedge Fund Practice at Glocap Search. “Even though it looks like many funds will end the year with flat performance, many employees will still receive sizeable bonuses in order to reward and retain them. Even without incentive fees, the GPs of firms this year will likely have to dip into management fees in order to compensate their teams.”
