Hedge funds don't have to defer bonus payments (but most are)
Hedge funds are making money again. In fact, as has been widely reported this morning, the top ten hedge funds made $28bn in the second half of 2010, eclipsing the combined profits of Goldman, JP Morgan, Citi, Barclays and HSBC.
Rather obviously, with even the larger hedge funds employing only a few hundred people, the potentially for earning a larger share of the profits is greater than at an investment bank.
Certainly, the rewards can be fairly hefty at hedge funds. For example, a portfolio manager working a top performing small fund earns an average of $1.23m, according to the 2011 Glocap Hedge Fund Compensation Report, a figure that rises to $4.85m for a larger fund.
What's more, hedge funds are largely exempt from the new FSA remuneration rules. Hedge funds come under the 'tier four' category of financial institutions in the regulator's eyes, which means deferrals, performance adjustments and remuneration committees are nowhere to be seen.
"In its rawest form, this essentially means it's business as usual for hedge funds," says Chris Page, associate partner heading up the remuneration team at KPMG. "But many have one eye on the impending Alternative Investment Fund Managers Directive, and are facing pressure from investors to be more responsible over remuneration. Over half of hedge funds are putting deferrals in place - it's not mandatory, but it's a growing trend."
But headhunters are pointing to some generous bonus payments this year and, according to Barry Seath, managing director at London-based hedge fund recruiter Mirage, "remuneration practices generally don't seem to have altered".
Of course, the spoils are never shared equally within hedge funds with the partners often receiving the lion's share. At Brevan Howard, which comes in at number eight on the LCH Investments rankings, 45 partners received an average of 15m each.
Are we therefore to assume that outside of the upper echelons pay is far from generous? There's no hard and fast rule. Page suggests the larger hedge funds are more "institutionalised" and therefore executives generally earn more, but the more collegiate environment in the smaller firms means profits are shared more evenly.
But hedge funds are making more of an effort to capture top trading talent from investment banks. Obviously, more proprietary traders are starting up on their own following the Volker rule clampdown on these activities in the US, but more investment bankers are eyeing the greater rewards on offer at hedge funds.
"A lot of investment banks raised base salaries significantly last year, and our hedge fund clients are matching that and offering greater bonus potential that is immediately payable in cash," says Seath. "This is proving to be quite an incentive, and hedge fund recruitment is busy. We're almost back up to 2007 levels."
