Hedge funds, despite increasing accusations of underperformance, equal glamour and riches for those working in financial services. Countless examples of investment banking traders switching from a salary and bonus to reaping millions in profits at their own hedge fund means they've always held a certain allure.
However, if you want don’t want the risk associated with running your own fund and just want the promise of a meaty bonus at a hedge fund, you’ll need to go for one of the behemoths. As the chart below from Citi’s prime finance division in a report released yesterday shows, headcount in hedge funds is tiny until they reach $10bn in AUM.
Again, working for a big hedge fund seems like a better bet in terms of career opportunities and earning potential. Once a hedge fund breaks the $10bn AUM threshold (the firms surveyed had an average of $36.4bn), there’s a 189% increase in investment headcount, each person managing an average of $266m.
Not surprisingly, it’s some of the larger hedge funds – Bluecrest and Millennium, for example – that have been indulging in the most hiring this year.
By contrast, a hedge fund that has $10bn in AUM, relies more heavily on support staff, as firms suddenly have to hire more operations and technology employees. What's more, it's not a great place to be for profitability - people working in $5bn hedge funds bring in an average of $628k in profits, while those in the giants earn $1.4m each. However, those working in hedge funds managing $10bn make an average of $742k - not a huge rise in profits considering the increase costs as the fund grows.
Citi’s conclusion is that any hedge fund wanting to break even needs to have at least $300m in AUM, as marketing and compliance costs, together with a lack of fee income, makes it uneconomical to run a small fund. From an employment perspective, though, stick with the big boys.