27 Oct 2011
Hedge fund compensation has declined by about 10% on average across a variety of roles this year, according to the latest edition of the Glocap Hedge Fund Compensation Report. The compensation data shows a wide dispersion of compensation, between and within firms, driven by a number of variables including role, seniority/experience, fund size and investment performance.
Total capital under management by hedge funds in the first and second quarters of 2011 hit a record $2.04 trillion, before declining sharply in the third quarter as hedge funds posted the fourth-worst performance quarter in history, with the HFRI fund weighted composite declining by 6.2%. The growth in AUM led to an increase in overall management fee income that partially offset the decrease in incentive fee income. In addition, despite the third quarter performance, the percentage of funds reaching their performance high watermarks in the trailing 12 months continued to rise, exceeding 70% as of the end of the third quarter, which further stabilised the pool of income available for compensation.
The decline in compensation was not evenly distributed across roles and fund types. Mid-to junior level investment professionals experienced year over year compensation changes ranging from increases of 7% to declines of 10%, with fund performance the most significant variable. Senior investment professionals, who have greater ability to influence fund performance and a greater component of incentive income, experienced a wider range of compensation in 2011, from flat year over year to declines of 30%.
Professionals in operations, including marketing, client service, accounting and compliance generally experienced flat to modest increases in compensation. There is also increasing evidence of firms using deferred compensation, claw back provisions and mandatory reinvestment to achieve better alignment of interest between investors and fund managers.
Glocap cited negative performance as the primary reason overall compensation fell. However, it noted that for junior analytical talent, compliance and marketing professionals compensation was largely shielded from any decline and in some of those roles increases occurred.
Total capital under management by hedge funds in the first and second quarters of 2011 hit a record $2.04 trillion, before declining sharply in the third quarter as hedge funds posted the fourth-worst performance quarter in history, with the HFRI fund weighted composite declining by 6.2%. The growth in AUM led to an increase in overall management fee income that partially offset the decrease in incentive fee income. In addition, despite the third quarter performance, the percentage of funds reaching their performance high watermarks in the trailing 12 months continued to rise, exceeding 70% as of the end of the third quarter, which further stabilised the pool of income available for compensation.
The decline in compensation was not evenly distributed across roles and fund types. Mid-to junior level investment professionals experienced year over year compensation changes ranging from increases of 7% to declines of 10%, with fund performance the most significant variable. Senior investment professionals, who have greater ability to influence fund performance and a greater component of incentive income, experienced a wider range of compensation in 2011, from flat year over year to declines of 30%.
Professionals in operations, including marketing, client service, accounting and compliance generally experienced flat to modest increases in compensation. There is also increasing evidence of firms using deferred compensation, claw back provisions and mandatory reinvestment to achieve better alignment of interest between investors and fund managers.
“Consistent with what we have seen since we began these reports nearly 10 years ago, compensation is primarily driven by performance, fund size and functional role, in that order, said Adam Zoia, CEO of Glocap. “That is, stronger performing funds pay more; large funds pay more for a given level of performance, and investment professional compensation is more volatile than back office compensation, particularly at the senior level.”
Glocap cited negative performance as the primary reason overall compensation fell. However, it noted that for junior analytical talent, compliance and marketing professionals compensation was largely shielded from any decline and in some of those roles increases occurred.
“Compensation in the hedge fund industry was not immune to powerful labour market trends observed generally and broadly across banking, finance and asset management in 2011,” said Ken Heinz, president of Hedge Fund Research, which collaborated in the report. “Compensation policies and practices have become a focal point of a hedge fund’s effort to attract both institutional investors and talented investment professionals. A fund’s ability to effectively manage these policies and incentives constitutes a crucial component of success and stability for both investors and employees.”
