Hedge fund managers celebrate pay raise following disappointing year

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The average hedge fund got absolutely trounced by the S&P in 2013, booking a year-end return of roughly 10%, compared to the near 30% rise of the index fund. How have hedge fund managers been taking the news? Many are crying all the way to the bank.

Average cash compensation for hedge fund managers rose 16% in 2013 to $330,000, according to Benchmark Compensation's annual report, despite the fact that the majority of funds failed to pace the general market. The survey, first reported by FIN Alternatives, found that less than one in five funds returned 25% or more.

The reason for what many outsiders may perceive as an inequitable raise in pay is based on a philosophical change made after the financial collapse. Hedge funds began better tying compensation to performance, as was the want of many investors. So, even though many funds didn’t gain at the level of generic indexes – like the S&P and Dow Jones – they did still make money. Hence, year-end bonuses for hedge fund managers were up nearly 30%. (Some funds do use indexes as a benchmark to assess performance, but clearly not as many as we thought).

Another contributing factor is the fact that investors don’t seem to notice – or care – that many hedge funds are losing to the overall market. Hedge fund assets under management increased by $228.8 billion in 2013, the fastest annual growth since before the crisis. Hedge funds didn’t have all that great of a year in what many have called a “rigged market,” but the industry seems to be doing just fine.

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