Choosing between work at an investment bank and a hedge fund is like deciding whether you'd rather work for a Fortune 500 company or work for yourself.
The risks involved in opening up your own business are great, but so are the potential rewards. In the end, it's as much a lifestyle decision as it is about money.
Do hedge funds pay more? Sure, if they're doing well. A good portfolio manager's base pay can be anywhere from $150,000 to $300,000, but they may also get 16% to 18% of the profits they generate on a pool of capital.
And that pool can be hundreds of millions of dollars, depending on the manager's track record. Few investment banks give traders and portfolio managers a percentage of their P&L. They prefer to give bonuses. While both are performance-based, the investment banking bonus is much more discretionary, and it requires that you can actually prove your unit's profits were generated by you.
"At a hedge fund, you are your own LLC. You're running your own business. It's very entrepreneurial," says Kyle Ramkissoon, principal at IJC Partners, a New York-based recruiter that specializes in hedge funds. "And hedge funds do offer the potential for higher compensation, because one generally gets a percentage of one's P&L. It's pay for performance, not some imaginary number in the sky that you might get if your manager looks upon you favorably."
Throw Me the Money
Ramkissoon says hedge funds almost always pay more than investment banks when it comes to top talent, but there are exceptions. Investment banks may throw money at a candidate if they want to start up a new group or add a stellar candidate to an existing group.
In one case, Ramkissoon says an investment bank wanted a managing director-level portfolio manager who was a global-macro specialist. While the hedge fund put in a competitive offer, in the end, it didn't even come close to what the investment bank was able to promise.
The hedge fund offered a base of $150,000, a minimum bonus of $100,000, and 18% of the profits the director would generate on managing $100 million of capital. The bank, however, offered a base of $350,000, a guaranteed bonus of $150,000, a sign-on fee of $150,000, and a percentage of his book's profits, deferred, however, and vesting over three years.
Not surprisingly, the candidate went with the investment bank, though Ramkissoon maintains he would have made more with the hedge fund over the long haul. "It was the most insane deal I've ever seen," Ramkissoon says. "Investment banks have more money to throw around than a hedge fund. But in the end, it's just a matter of how badly a company wants a particular trader."
Track Records Pay
Deborah Rivera, founder of New York-based alternative-investment recruiter The Succession Group, says demand at hedge funds and fund of funds at investment banks is strong right now, particularly for traders with track records in particular sectors or with a particular strategy.
The result is that many of the Street's savviest traders simply don't want to remain at a bulge bracket firm once they are able to distinguish their abilities from the "company." At that point they are willing to take the plunge and go for the more entrepreneurial route, Rivera says.
"I know of a fund of funds that's already lost five people to hedge funds," she says. "The investment banks want to recruit, but in the end, they find themselves challenged to recruit the traders with track records."
To date, investment banks have not been competitive because they have not offered the payouts or comparable guarantees that hedge funds have, although there are always exceptions. Without payouts and guarantees, the investment banks will continue to see top traders going to - or remaining at - hedge funds, Rivera says.
What Cost Time?
But compensation is just one piece of the puzzle. There are quality-of-work and quality-of-life issues that can make all the difference. Some, like 23-year-old associates, may prefer an investment bank because they see safety and prestige in a large institution - even though they might be able to make more at a hedge fund. Even those willing to go to hedge funds sometimes draw a line in the sand, requiring that the fund have, say, $1 billion in assets.
And then some like the entrepreneurial environment of a hedge fund, where decisions can be made quickly and not have to go before a whole board, and where the firm is answerable only to its investors, not to thousands of shareholders.
"Hedge funds don't have that restrictive, inflexible, bureaucratic culture that large corporations do," says Ramkissoon. "Some of the portfolio managers I talk to don't come in until noon or 1 p.m. in the afternoon. They're not in at 7 a.m. and leaving at 10 p.m. at night just because they have to show their face every day at a certain time."
In general, if you're a successful trader with a track record, you probably want to be at a hedge fund, according to recruiters. Why be somewhere with a discretionary bonus when you could have a guarantee that you could take home a percentage of what you make?
But choosing between the two isn't something to which everyone is privy. Hedge funds usually only look at the top 1% of traders and managers in any one strategy. The bar is high. As one recruiter put it, it's like deciding whether to be a supermodel or a secretary. It's just not a choice a lot of people have to make.
"You have to be a superstar in your area," Rivera says.