Asset managers are prioritising pay hikes for tech-savvy junior employees in a bid to push down overall compensation costs as they prepare for a new era of Big Data and quantitative finance amid pressure on fees and a need to aggressively cut costs.
Hedge funds and asset management firms are expected to increase bonuses for their employees by an average of 7% this year, according to a new research by Greenwich Associates and compensation consultants Johnson Associates, based on 1,000 interviews with buy-side professionals. But this could be the last hurrah for asset managers.
“We’re in a bull market, returns are much higher this year, and most asset managers still have conventional compensation models. While their funds are performing, they need to reward their people,” says William Llamas, associate director at Greenwich Associates and author of the report.
“But they also have to invest more in technology, hire more compliance professionals as well as continuing to deal with fee pressure and regulatory demands,” he adds. “All of this investment will hit employee compensation from next year.”
Equity hedge fund professionals are expected to earn an average of $600k this year, says the research, up from $580k in 2016. Meanwhile, fixed income focused employees will haul in an average of $970k in hedge funds and $500k within traditional asset managers, according to the figures.
But the buy-side has switched its focus. Now, instead of rewarding senior fund managers or its star PMs, fund managers and hedge funds have instead hiked up pay for their junior staff. Greenwich could not provide any figures on how much junior pay was likely to increase this year, but said younger employees were getting “big jumps”.
"It’s smart of the buy-side to invest in juniors,” says Llamas. “Increasing pay significantly for them is much cheaper than doing the same for senior staff.”
“They also have one eye on the future,” he says. “Algo trading and quant strategies are growing, and they can train the juniors – who've grow up with this technology – from the ground up. The older guys are adapting, and their market experience is valuable, but they need a healthy mix of people.”
The buy-side is frustrated by the juniorisation of the trading floors in investment banks and believe they’re not getting the same quality of service, said Llamas. They’re not following the same model – namely, firing expensive senior PMs and training up juniors to do the job for less – but are aiming to mix up the teams to adapt to the changing environment.
While asset management firms are not firing senior employees, Llamas says that juniorisation will depress salaries and mean compensation heads down overall. Compensation will shrink, and asset management professionals will be asked to do more – covering more clients and sectors, says the research.
Despite the increase in pay this year, asset management firms do not appear to be gunning for growth in the front office. Instead, the focus is on recruiting Big Data and technology expertise while investing in junior investment staff, Greenwich suggests.
What’s more, there’s less of a focus on star portfolio managers. Individual performance now determines just 25-45% of overall bonus payments, says the research, meaning 55-75% of variable compensation is down to company and departmental performance.
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