The highest bonuses and greatest upside potential rests with senior hedge fund managers who shoulder the bulk of responsibility for overall fund performance. He bears the stress of managing the team, making billion-dollar investing calls, and constantly networking with new investors to maintain sufficient capital for the fund. And because most managers have at least some “skin in the game”, e.g. they’ve also put a large amount of equity in their fund, the stress is even higher. All of that makes more sense of how incredibly they can get paid.

1. About Hedge Fund Managers

1.1. How to be a hedge fund manager?

Hedge fund managers oversee a specific hedge fund or a targeted portion of it. In big multi-manager funds with a solid hierarchical structure, it usually takes 12-20 years of investing experience for a professional to climb up the position of Portfolio Manager. Usually, only investment professionals who reached the peak of their career are qualified to sit this position (unless you start your own hedge fund during your 20s – Check out how).

 

1.2. Scope of work of a hedge fund manager

The hedge fund manager is the ultimate decision-maker of any hedge fund, as he or she has large equity interests in the fund. To put it simply, the manager receives investment ideas from internal analysts within his investment team or from sell-side analysts, roasts the idea, and finally decides on what and when to execute trades. One major part of his job is also to network with wealthy individuals to raise funds (with new clients) or to maintain good relationships (with current investors).

 

Here’s a summary of the job of a hedge fund manager:

– Clients and investors management

– Read reports, talk to analysts & companies to monitor industry and economic trends

– Evaluate and challenge analysts’ ideas

– Make adjustments to portfolios

2. How do Hedge Fund professionals get paid?

The general income structure of a hedge fund is the famous 20 -2: 2% of investors’ initial investment is paid out to the fund as the Management fee, regardless of PnL, and 20% of that investment is charged at the end of the year, based on profits the fund generates. This structure is important in that it is reflected in compensation for hedge fund professionals.

Base salary is the fixed amount of payout for investment professionals, usually at around $200,000 for managers. This amount of salary, along with other business expenses, is often paid out from the 1.5%-2% management fee out of the investors’ capital.

Bonuses are cash and other financial incentives provided for finance professionals at year-end bonus seasons, reflecting the fund’s work during the recent 12-month period. This amount is usually driven from the 20% performance in the fee structure. Exceptions can be that bonuses are paid out from the 2% management fee in economic downturns, when most funds have poor performance but choose to pay reasonable bonuses to maintain their workforce.

3. Average Salary – What drives the Compensation of Hedge Fund Managers?

3.1. The average salary

A 2017 survey by Sum Zero – the world’s largest investment community – determined that the average compensation for money managers hovered at an average of approximately $350,000, with pay ranges rising drastically, as years of experience in the industry add up. A person with 20 to 25 years of experience may have an average salary range from $260,000 to $705,000, according to the survey.

3.2. Hedge Fund PM payout formula

Salary is drawn from the fund’s year-end payout. Manager’s bonuses equal to the fund’s total return subtracting every running cost, then multiply by the manager’s payout rate.

Assuming you’re managing a $100 million portfolio at a HF, with $200,000 base salary. Expenses cost $300,000 (for data, technology, operations, etc.), and your payout is 20%. Suppose that you generate 5% of return for the fund, that’d be $5 million.

-> Your payout = (5mm – 300k)*15%= $705,000, where $505,000 gets paid out as a bonus and $200,000 as the salary base during the year.

3.3. Driving factors

The two driving factors that have more weighting than all others in determining hedge fund compensation are fund size and fund performance. As a matter of fact, the larger the fund, the bigger the paycheck can be for its manager. The 2018 All-America Buy-side Compensation survey by Institutional Investor showed very hopeful expectations from managers of funds with more than $75 billion AUM.

According to the survey, Hedge fund portfolio managers said they expected to earn $346,164 in base pay on average, up from $277,268 last year. Variable pay — including bonuses, commissions, and options — averaged just over $1 million.

 

The sector coverage and asset class of the fund, alongside the manager’s years of experience and graduate degree, etc. also drive the compensation schemes, but not as critically.

A post-graduate degree, especially general management degrees like an MBA is usually useful for upending mid-level professionals’ career trajectories – but perhaps not for hedge fund professionals. SumZero’s 2016 Fund Compensation Report showed that Hedge fund associates with advanced business actually bring home less than their peers with undergraduate degrees only.

Pre-MBA associates’ average compensation is $200,000, out of which $90,000 is a bonus, whereas MBA associates only took home an average of $184,000, including a bonus of $60,000. This data is based on SumZero’s survey on more than 1,800 associate positions between 2012 and 2015. Since MBA programs are supposed to “take someone away from investing in the market”, a CFA is probably more valued.

4. Top 10 Hedge Fund Managers’ Earnings in 2020

According to Reuters, the top 10 hedge fund managers globally earned $20.1 billion in 2020, a 50.2% rise from the $13.4 billion in 2019. This is against the backdrop of volatile markets amid the coronavirus pandemic. Managers from the top 10 hedge fund all bring home more than $1 billion, compared to only 8 in 2019. Let’s have a look at the eye-popping paycheck of managers at several funds:

DCF

  • Millennium Management’s Israel Englander: $3.8 billion
  • Renaissance Technologies’ James Simon: $2.6 billion
  • Tiger Global Management’s Chase Coleman: $2.5 billion
  • Citadel’s Ken Griffin: $1.8 billion
  • Pershing Square’s Bill Ackman: $1.4 billion

These giant numbers are what captivates investment professionals to head to hedge funds. But bear in mind  

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