Hedge Fund Compensation: Too Top-Heavy?

When it comes to compensating their staffs, are the hedge fund industry's titans too greedy for their own good?

Alpha Magazine grabbed plenty of press last month for its list of the 25 best-paid hedge fund managers of 2006, which included three billion-dollar men and no one who made less than $240 million.

But the shift from two-comma to three-comma compensation for the industry's top dogs has a downside. In an item promoting its complete survey report on hedge fund compensation, Alpha suggests that the leaders of many successful fund firms may be committing a strategic error by keeping the lion's share of fee income for themselves instead of sharing more with portfolio managers and analysts.

"At far too many funds, the top guys are getting disproportionately rich, and that leads to a lot of turnover, which can hurt investors," Michael Hennessy, a co-founder and managing director of institutional investment adviser Morgan Creek Capital Management, told Alpha.

That criticism may sound paradoxical. It's the exact opposite of the complaint often heard about both bulge-bracket investment banks and institutional asset managers, namely that bottom lines suffer because management periodically lets rank-and-file compensation spiral out of control. On top of that, the supporting players at hedge funds are anything but paupers: Analysts with five years of experience can easily make $500,000 or more if their ideas contribute to strong performance.

Still, hedge funds generally are not "career vehicles," says a recruiter who asks not to be identified. He says often the main goal at such firms is to maximize the return to the firm's partners rather than provide advancement opportunities for staff. So, a good junior analyst's next step often will be to market himself to a bigger hedge fund, after compiling a three- to five-year track record.

Have you worked at a hedge fund and felt shortchanged? Post a comment below.