The myth of bringing in the big bucks at hedge funds

Who wouldn’t want to be David Tepper of Appalossa Management, Carl Icahn of Icahn Capital, or Steven Cohen of SAC Capital Advisors, making, respectively, $2.2 billion, $1.9 billion and $1.3 billion in 2012. These hedge fund honchos and their well-publicised wealth inspire many to pursue a job in the industry. For all the Teppers and Icahns of the world, however, most hedge fund employees subsist on good, but not astronomical, pay.

“I am living proof that you can work for hedge fund for 30 years and still need to stay in employment,” said Paul Smith, a hedge fund veteran who now heads up the CFA Institute in Asia-Pacific in Hong Kong “The hedge fund industry is very seductive, but manages to keep people working in the sector with the promise of large rewards that rarely materialise.”

Smith estimates that a junior hedge fund manager working in Hong Kong earns around £4k a month (or £48k a year) with the hope of a big annual bonus. In the UK, Tim Wright, head of asset management remuneration at PwC, believes that average salaries for junior portfolio managers in hedge funds in London are between £70k and 100k, rising to £150k at the senior end. In the US, junior hedge fund staff earned $210k in 2012 on average, according to figures from headhunters Glocap.

Wright says that hedge fund investment professionals earn marginally higher base salaries that fund managers at mutual funds. Between £80-130k is common in the UK for portfolio managers with 5-8 years’ experience, according to figures from recruiters Robert Walters.

“Obviously, there’s greater upside potential if the hedge fund has a good year – most funds split profits between employees, something a mutual fund manager could never do because of governance reasons – but there’s a higher probability that in a down market, they will get zero bonuses,” he said.

Outside of the large, publicly listed hedge funds, employment benefits are not commonplace, said Smith. “You’re working for a cut of the performance, but you get a low base salary, no pension plan and employment prospects aren’t always good. The fact is that most people working in hedge funds would be better off getting a proper job, which is what more people in Asia are doing.”

Investment bankers are increasingly looking to move into the hedge fund space to escape increasing regulation around bonuses, according to Barry Seath, chief executive of hedge fund-focused Mirage Recruitment.

At the senior end, this means going it alone. In February, Deepak Gulati left his role as head of J.P. Morgan’s prop trading desk to start Argentiere Capital in Switzerland, former Citigroup director Joel Salomon launched SaLaurMor Capital in January and Nomura’s Borut Miklavcic, Ravin Seeneevassen and Thomas Groves started global macro fund LindenGrove Capital late last year.

The fast-track to big money is starting up your own firm with a formidable reputation as a sell-side trader, said Wright.

“Making it to a partnership with a solid track record where you share any profits made is the obvious way to pull in large pay packages in the hedge fund sector,” he said.