2016 will be the year of haves and have-nots for hedge fund investment professionals, according to compensation data from CompIQ and performance data from HFR.
The widening YTD performance gap will translate to large increases in bonuses for top-performing funds and decreases in bonuses for bottom-performing funds especially for upper level management and key investment professionals whose compensation is more closely tied to their fund’s performance and overall assets under management.
Across the board, non-investment professional roles will show salary increases, albeit at a modest, single-digit level.
A shift in the range of performance from fund to fund compared with last year is driving a compensation disparity for the same level of professionals at similarly sized funds. The top third of funds returned close to 15 per cent while the bottom performing third of funds lost roughly 7 per cent, resulting in a total performance spread of 22 per cent. In comparison, last year’s spread was roughly 20 per cent, but was weighted heavily in the red, with the top third returning 8.7 per cent and the bottom third returning -11.5 per cent.
The nature of this performance gap will drive a substantial compensation gap. For instance, a senior analyst at the top performing funds can be expected to make 2.8x more in total compensation than a senior analyst at the bottom performing funds. Last year the figure was 1.5x.
This gap will increase as positions become more senior; portfolio managers at top-performers can expect a total compensation amount 6.6x higher than those at the bottom-performing funds. Last year this ratio was 4.5x. Over the past few years, firms have recognised the increasing difficulty of generating alpha, causing this pay gap to widen as firms increase compensation of top performers to ensure retention.
At the junior level, the effect will not be as pronounced as firms have continued to shield junior talent from the market vicissitudes —both in the front office and back office. More junior members of a firm will in fact see modest, single digit increases in their total compensation. At the junior levels, there are many outlets for the talent (such as technology, private equity, banking, consulting and corporations) and high demand compared to supply. Hedge funds are well aware of this and continue to increase junior compensation to avoid turn-over and in reaction to these broader market forces.
Average base salaries for analysts at large firms remained unchanged while bonuses increased 4.7 per cent on average. Even though firm profitability is down for the bottom performing funds, it is expected that the juniors will be “looked after” as the firms recognise their skills and efforts are in demand.
HFR expects the performance gap to be particularly impactful for the portfolio managers. While base salaries will not change, bonuses are expected to be down 3-7 per cent at bottom performing funds. For portfolio managers at the mid-performing third, HFR expects bonuses to be up between 1 and 6 per cent, and up roughly 10 per cent and more at the top-performing third.
As hedge funds have increased demand for quantitative talent, they have had to alter compensation structures. Many of the candidates come from Silicon Valley and from corporations where the compensation is primarily in the form of a base salary, and prefer their compensation to continue to be weighted that way. This trend combined with an increase in demand for top quantitative talent drove an increase in base salaries of 8 per cent and certain firms reported much higher increases ranging as much as 50 per cent when recruiting from non-hedge fund pools.
”This year we saw the acceleration of the trend toward paying the same level individuals at the same fund more widely variable pay based on each individuals performance and their market price,” says Adam Zoia, CEO and founder of Glocap Search. “Similarly, performance caused an increased disparity in pay with the highest tertile performing funds paying as much as nearly 7x as much as the lowest tertile performing funds for the same level investment professional. Only at the junior investment professional level and junior to middle back office level do individuals continue to experience a fairly steady, low single digit increase in compensation year-over-year irrespective of their fund’s performance. This is a year of the haves and have nots both at the fund and senior investment professional level.”
“Trends in hedge fund compensation reflect an increasingly intense and competitive performance environment, not only within the hedge fund industry, but across traditional asset management and investment banking,” says Kenneth J Heinz (pictured), president of HFR. “The hedge fund industry fee structure continues to evolve with increased use of incentive fee hurdles, though individual fund performance continues to be the primary driver of executive compensation growth or contraction.”
