As hedge funds continue to grow in both numbers and assets, the role of the chief financial officer is becoming more challenging and high profile, according to industry experts.
The number of hedge funds has grown from 6,500 in 2000 to some 9,300 today.
In turn, this has led to an increase in complex transactions and valuation questions. "The landscape has become more complicated," says Christopher Geczy, assistant professor of finance at the University of Pennsylvania's Wharton School, a hedge fund expert whose background includes research on hedge fund strategies and performance.
While funds with an excess of $25 million in assets are required to register with the Securities and Exchange Commission, the CFO retains a critical role even at smaller funds.
The increasing scope of sophisticated transactions - such as private equity deals - means hedge fund CFOs must address asset valuation questions more regularly. For example, some must be adept in dealing with structures such as the "side pocket," a legal construct that facilitates fund managers' investments in some types of illiquid securities that aren't publicly traded. Meanwhile, CFOs of "activist" hedge funds, which exert pressure on underperforming companies through their ownership stakes, may rely on technical aspects of securities lending rules that allow funds to borrow shares in order to vote them, instead of the more traditional process of borrowing them to sell short. "They have to be well aware of certain legal constructs that were used less in the past," says Geczy. CFOs may also spend more time explaining the new maneuvers to investors, he says.
While growing accounting responsibilities may be a vehicle for career advancement, they may also be a source of job stress. "It's good for the CFOs, but it's obviously harder," says Alan Johnson, a New York City-based compensation consultant. "It depends on your skill set. If you're not a broader-gauged individual, the money could be great but there could be a lot of pressure."
Johnson says another factor that may add to the CFO's workload is a boss managers who has too many of his own responsibilities, or has weak management skills. That can leave the CFO and the fund's top lawyer to pick up the slack. "In most cases, the trading guru is not a great manager," Johnson observes. "Even when they are, they're spread too thin."
Increased responsibilities also mean additional exposure to liability. Funds that are subject to new SEC rules must retain all of their e-mails, for example, creating the potential for access to correspondence in a legal proceeding.
How much is the increased responsibility and exposure worth? During the past five years, pay has increased steadily, says Johnson. A fund with $200 million in assets may pay about $300,000 per year. The salary at a larger fund - with, say, $1 billion in assets - is about $650,000, while salaries at the largest funds can eclipse $1 million annually.