Hedge Funds Put Premium on Risk Executives

Despite the recent blowups at a number of hedge funds, alternative investment houses are still paying risk managers a lot of money.

The 2007 Risk Talent Associates Professional Compensation Survey - Asset Management shows that alternative investment firms are using strong cash bonuses to balance the job perils of moving from a traditional financial services firm to a less established operation. The survey is published by search firm Risk Talent Associates in New York.

It found Chief Risk Officers at alternative investment firms earned some $1.2 million in total compensation during 2006 compared to $907,000 in 2005. The 2006 packages broke down as $252,000 in salary, $797,000 in cash bonuses, and $205,000 in non-cash bonuses. In 2005, the split was $237,000 in salary, $500,000 in cash bonuses, and $170,000 in non-cash bonuses.

Michael Woodrow, RTA's president, expects the trend to continue for some time. With increasing volatility in the markets, risk managers are even more in demand. The survey shows alternative investment firms are recruiting top risk management talent from sell-side investment banks by dangling big cash bonuses. It's not surprising that the greater a job hop's risk, the higher its compensation: "total compensation is highest at asset management companies with the smallest risk organizations, driven by much more lucrative cash bonus pay," the survey says.

"Market volatility requires sophisticated risk management, and in volatile times risk managers earn their pay and receive much senior focus," Woodrow says. "We continue to receive calls for senior risk officers - in newly created positions - at hedge funds.

Compensation, he adds, isn't the key driver in hiring. Instead, hedge funds are looking for specialists who can take "smart risks or balance portfolios to maximize risks and rewards."

Chart a Careful Course

Those in the field need to make sure they move in a wise fashion, Woodrow says, since volatile times require restraint and market savvy. Hedge fund risk managers must remember their quantitative and strategic skills, so that "they have credibility when they point out that a certain strategy or play is too risky for the return being generated," he explains.

Surprisingly, hedge fund blowups may be the ideal time for risk managers to command their worth. "Several of the hedge funds that blew up in the past two years called us about assisting them with hiring a new senior risk officer. None of them moved forward - with us or on their own," Woodrow recalls. "It seems that some hedge funds know they need a senior risk officer, but they can't always decide on which skills to look for, and then don't take action."

Smart asset management firms in all sectors are looking for the best talent at a time when experienced professionals are lacking. Many risk managers are moving around in order to boost their compensation. The survey says 22 percent of its respondents in asset management have changed jobs in the last two years, and 21 percent expect to change jobs in the next two years.

Other Sector

In the senior ranks, positions in alternative investment houses are more lucrative than those at traditional asset management or insurance. In 2006, chief risk officers in traditional asset management earned $837,000, while those in insurance took home $840,000.

However, risk managers at such firms shouldn't lament. Compensation for risk managers across all asset management sectors increased 17 percent in 2006 over 2005, boosted by not only alternative investment firms, but also steady growth at traditional asset management and insurance firms. Salaries grew an average of six percent, while cash-bonuses and non-cash bonuses jumped 27 percent and 13 percent respectively. These figures continue the trend of the previous year, when risk managers in asset management (across all firms) enjoyed an 18 percent growth in compensation from 2004.

Woodrow believes the market for risk executives will stay strong in 2007, 2008 and afterward. "There is a shortage of talent, the global markets are expanding, and the cost of ineffective risk management can be catastrophic," he says.