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Hedge fund compensation declines on performance volatility

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Hedge fund compensation declined by approximately ten per cent on average across varied functional roles in 2011, according to the 2012 edition of the Glocap Hedge Fund Compensation Report.

Glocap’s compensation data shows a wide dispersion of compensation, between and within firms, driven by a number of variables including role, seniority/experience, fund size and performance for the year.

The total hedge fund industry surpassed previous record levels of total capital under management in both 1Q and 2Q11, reaching $2.04 trillion, before declining sharply in 3Q as the hedge fund industry posted the fourth-worst performance quarter in history, with the HFRI Fund Weighted Composite declining by -6.2 per cent.  The growth in assets under management led to an increase in overall management fee income that partially offset the decrease in incentive fee income. In addition, despite 3Q performance, the percentage of funds reaching their performance high watermarks in the trailing 12 months continued to rise, exceeding 70 per cent as of the end of 3Q11, which further stabilised the pool of income available for compensation.

The decline in compensation was not evenly distributed across roles and fund types. Mid-to junior level investment professionals experienced year over year compensation changes ranging from increases of 7 per cent to declines of 10 per cent, with fund performance the most significant variable. Senior investment professionals, who have greater ability to influence fund performance and a greater component of incentive income, experienced a wider range of compensation in 2011, from flat year over year to declines of thirty per cent. Professionals in operations, including marketing, client service, accounting and compliance generally experienced flat to modest increases in compensation. Themes of increasing use of deferred compensation, claw back provisions and mandatory reinvestment to achieve better alignment of interest between investors and fund managers continued to be salient; however, the spread of these provisions was limited in 2011.

According to Adam Zoia, CEO of Glocap: “Consistent with what we have seen since we began these reports nearly 10 years ago, compensation is primarily driven by performance, fund size and functional role, in that order.  That is, stronger performing funds pay more; large funds pay more for a given level of performance, and investment professional compensation is more volatile than back office compensation, particularly at the senior level.  

“This year, performance suffered which was the primary reason compensation overall fell.  However, for junior analytical talent, compliance and marketing professionals compensation was largely shielded from any decline and in some of those roles increases were recorded.”

“Compensation in the hedge fund industry was not immune to powerful labor market trends observed generally and broadly across banking, finance and asset management in 2011,” says Kenneth J Heinz (pictured), President of HFR Inc. “Compensation policies and practices have become a focal point of a hedge fund’s effort to attract both institutional investors and talented investment professionals.  A fund’s ability to effectively manage these policies and incentives constitutes a crucial component of success and stability for both investors and employees.”


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