Hedge fund compensation rose in 2012 following a challenging environment in the prior year, as industry assets rose to a record level, according to HFR and Glocap’s 2013 Hedge Fund Compensation Report.
Average gains across functional roles varied significantly as a direct result of a number of factors, with marketing and compliance and senior investment professional roles at profitable funds experiencing the largest increases. Overall, the average change ranged from a 15 per cent increase to a decline of nearly five per cent over 2011 levels.
Trends in 2012 include a cautious hiring environment, increases in profit sharing and consolidation of hedge fund capital in the most established firms.
Compensation structures continue to evolve to longer duration incentives, in contrast to the trend of greater liquidity, reporting and transparency for investors.
Total hedge fund industry capital rose to a record of USD2.19trn, as the HFRI Fund Weighted Composite Index posted a gain of 4.8 per cent in the first three quarters of the year.
Net new inflows over this period have remained concentrated in the most established firms, with firms managing USD5bn or more receiving USD43bn of inflows, while firms managing less than USD5bn experiencing outflows of USD12bn. Over the trailing 12 months, 43 per cent of all hedge funds have reached their respective high watermarks, which increased the pool of incentive fee income available to compensate hedge fund professionals.
Hedge fund portfolio managers (PM) and traders experienced solid increases in compensation for the year, with performance and fund size the primary contributing factors; 2012 compensation trends included greater alignment of interest by increasing incorporation of longer term incentive structures across highly compensated positions. Portfolio manager compensation increases ranged from flat to 15 per cent, with PMs at mid-performing, mid-sized firms receiving an average of USD1.3m; top performing and larger firm PMs more than doubled this figure.
"Hedge funds created bonus pools in 2012 based on their continued high asset levels and positive performance, which is allowing them to reward their key staff. The fee structure has allowed them to generate profits, through a challenging environment and in contrast to trends at investment banks which continue to downsize staff and shrink bonuses," says Anthony Keizner, co-head of Glocap's hedge fund practice.
Traders also experienced increases despite the uncertain regulatory environment, tracking a range of increase between -1.5 per cent to +14 per cent, with senior traders at large firms with mid-range performance receiving USD500,000 in total compensation. Intense competition limited compensation pools at entry and mid-level Analyst positions, with these ranging from -5.0 per cent to +9.0 per cent; smaller to mid-sized firms generally fell on the higher end of the range, with a more narrow distribution.
Steady demand and increasingly diverse, integrated skill sets drove gains across professionals in risk management, marketing, CFO, COO, legal, accounting and information technology. In each of these cases, the roles evolved and are expected to continue to move away from closed back office responsibilities and operate with a critical and demonstrated understanding of and familiarity with the fund's investment and trading strategies, as well as the broader macroeconomic and regulatory environment. In addition, individuals possessing valuable experience, flexibility and responsiveness are able to command a premium. Across each role, single-digit percentage compensation gains over the prior year were the norm in 2012.
Compensation data suggests the consolidation of the past four years at fund of funds has stabilised levels in 2012, with these also posting single-digit gains for 2012.
"Hedge fund compensation in 2012 reflects continued demand from investors for professionals, infrastructure, strategies and performance, with these tempered by sensitivity to costs, liquidity and transparency requirements," says Kenneth J. Heinz, president of HFR. "As the industry evolves to satisfy institutional and regulatory requirements, professionals across all functional areas with valuable experience, knowledge and skills will continue to be in high demand by investors and firms of all sizes."
Glocap is an investment management search firm covering all functional roles within the industry through its four US offices. HFR is a provider of research, indexation and analysis of the global hedge fund industry.