HFR: Performance Dispersion, Quant Demand Driving Compensation Shifts

Nov 22 2016 | 10:20pm ET

Wide dispersion in fund performance this year will translate to similarly large differences in the bonuses paid to hedge fund managers, according to a study of proprietary compensation and performance data from CompIQ and Hedge Fund Research as part of Glocap's 2017 Hedge Fund Compensation Report, while increasing demand for quantitative talent is changing some compensation structures.

In particular, top-performing funds will see large increases in bonuses, while decreases are expected 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, according to a statement by HFR. 

As previously reported by FINalternatives last week, the top third of funds returned close to 15% while the bottom performing third of funds lost roughly 7%, resulting in a total performance spread of 22%.  Last year’s spread of 20% was weighted heavily in the red, with the top third returning 8.7% and the bottom third returning -11.5%. It is this 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, HFR said.

The nature of this performance gap will drive a substantial compensation gap, the survey suggests. 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, HFR said. 

At the junior level, the effect will not be as pronounced as firms have continued to shield junior talent in both the front and back offices; more junior members of a firm will in fact see modest, single digit increases in their total compensation. 

Other highlights from this year's analysis:

  • Average base salaries for analysts at large firms remained unchanged while bonuses increased 4.7% on average. Even though firm profitability is down for the bottom performing funds, expect more junior employees to be shielded as firms recognize their skills and efforts are in demand. 
  • While base salaries for portfolio managers, bonuses are expected to be down 3-7% at bottom performing funds, up 1%-6% at mid-performing funds, and up 10%+ in top-performing third percentile.
  • Increasing demand for quantitative talent is driving a shift in compensation structures. Many candidates come from Silicon Valley and from corporations where the compensation is primarily in the form of a base salary, and they prefer their compensation to continue to be weighted that way. Accordingly, base salaries increased 8% and certain firms reported much higher increases ranging as much as 50% when recruiting from non-hedge fund pools.

“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,” stated Ken Heinz, 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.”

Glocap Search is a executive search firm dedicated to serving the specialized recruiting needs of clients in the alternative investment industry. The firm’s Hedge Fund Compensation Report is in its 15th year, while its CompIQ online platform uses machine learning and artificial intelligence to provide highly detailed and precise compensation recommendations for employers in the alternative investment industry. 

Established in 1992, HFR produces the HFRI, HFRX and HFRU Indices, industry benchmarks for global hedge fund performance. HFR calculates over 100 indices of hedge fund performance ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus.


In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...

Lifestyle

CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...