Hedge Fund Compensation

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Overview

Compensation at hedge funds can reach levels higher than other careers in finance at relatively earlier periods. Unlike pay in private equity which is which is somewhat standardized across the industry and falls within a relatively narrow band, mid-level professionals working at hedge funds can earn well over $500k at larger funds during good performance years.

Compensation overall is influenced by a fund's total AUM, performance, and fee structure. This means that while compensation can be high under good conditions, it is much more volatile overall relative to other finance roles.

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Base Salary

Compensation data is somewhat opaque in the industry, but data exists based on surveys conducted by research firms and headhunters. The below charts reflect data gathered by Dynamic Search Partners by surveying professionals in the industry.

The two most obvious takeaways are that fund size has a large influence on total compensation, and bonuses can potentially make up the majority of total earnings.

Note: Figures in USD thousands, representing the median for U.S. firms.

By looking at the data above, you'll notice that the variance in base salaries is not material at different experience levels when compared to the contribution of bonuses to total compensation. Base salaries at both smaller and larger funds doesn't rise much further than the ~$200k level while bonuses can be multiples of that.

In the early years at funds with smaller AUMs, juniors can expect to make $245k-$300k in all-in compensation, which can match levels in private equity or private credit. It's not until the later years working in a hedge fund where compensation really starts to balloon.

Even at smaller funds, you can make close to $600k with just six years of buy-side experience which is around the time you'd be 30.

In multi-managers and larger funds assuming great performance, you can reasonably expect to make close to $400k early in your career, and close to $1mm by the time you're 30.

It's hard to get good data beyond that point because outcomes really just depend on your performance. As you start getting more direct control over P&L in your fund or pod, you'll have more control over compensation as you start actually taking risk and deploying capital.

Bonus Structure

Bonuses are paid out of a pool that's directly related to the fund's performance. At pods, PM's negotiate a share of the bonus pool from the P&L they generate.

In a fund that follows a 2/20 fee structure (2% management fee and 20% performance fee), the bonus pool would be paid out of the 20% incentive fee that is paid to the overall fund from outperformance based on the profits earned on investor capital.

Members of the pod don't get the entire 20% incentive fee that's paid to the fund; they negotiate a portion of the total P&L they generate.

For example, a PM at a pod can negotiates a contract with a platform that they will receive a bonus pool equal to ~10% of the net P&L.

Let's say a pod has a $2 billion capital allocation. If the pod generates a 20% return, that would equate to $400 million in overall gross profit.

From that, the platform or multi-manager would receive a 20% incentive fee ($80 million), while the investors would receive the remaining $320 million (less the any management fee paid to the fund).

From the $400 million gross profit, pods would also negotiate what fees they would be responsible for which would come out of the gross P&L to result in a net P&L from which the bonus pool is determined.

For example, let's say total costs were $20 million (including borrowing/financing fees, travel, and other costs). This would result in a net P&L of $380 million.

From this net P&L amount, if the PM negotiated a 13% bonus payout percentage, the total bonus pool would be ~$50 million ($380 million x 13% = $49.4 million).

The image below illustrates how a ~$50 million bonus pool could be split within a pod.

Again, the actual payouts negotiated can vary substantially within a multi-manager fund and are negotiated differently by each PM. The PM would then decide how to allocate the bonus pool among the members of the team reflecting what they believe their contributions to generating the P&L was.

At junior levels, bonus payouts are completely discretionary. While huge payouts may not be typical even during great years, some PMs "smooth" out bonuses for juniors during bad years to promote retention.

At more senior levels, bonuses are tied directly to P&L. PMs would keep the bulk of a team's earnings and would distribute the remainder based on individual contribution.

At single manager funds, bonuses are directly linked to the performance fee established with investors, and it is up to the CIO/manager's discretion how to allocate the fee between themselves and the staff.

Overall, your compensation at more junior levels is up to the discretion of your PM, whether at a single-manager or multi-manager fund.

Summary

Hedge fund compensation provides the potential for the most lucrative payouts in finance, but it can be highly volatile. Base salaries top out around $200k while bonuses can make up the bulk of all-in compensation and swing widely depending on both performance and fund size. At junior levels, bonuses are ultimately decided by your PM and are a function of your team's P&L and your perceived contribution to the group's success.