Look at the announced annual rich list, you will notice that hedge fund manager salary is a major constituent of the rising wealth of many participants in the list. In fact, whether you consider the entry level roles or senior positions, most people working with hedge funds have raked up a fortune in terms of creating personal wealth. We all know that hedge fund salary is one of the highest in the financial market.
The hedge fund industry is, in fact, known for the huge salary structures. In fact, in many ways, hedge fund salaries are stuff that legends are made up of. While regulators have introduced several rules for banking institutions on steep bonus payments, the scenario for hedge funds is different. The variable payment structure followed by most hedge funds is still pretty much outside the ambit of strict regulation. A quick back of the hand calculation reveals that hedge fund managers average salary is north of $250,000.
This could be even higher depending on a variety of factors like bonus payments and fund performance. In many ways, I would say that the journey towards getting rich is often a complicated maze of partnerships. It is an employment status in the hedge fund world. When partners invest money in a hedge fund, the profit is shared on a discretionary basis. While a bit of the money is ploughed back into the company, a major part of it goes into profit sharing.
The money play in hedge funds is also dependent on the kind of investment that the hedge fund involves. There are some funds which have a minimum investment of $20 million. But given the recent turmoil in the financial markets, some have reduced the minimum requirement to as low as $1000. It is needless to mention that this has a direct implication on the hedge fund manager salary. But that said, you can still claim that the industry has a significantly higher compensation rate.
However, you must understand that the hike in Hedge fund analyst salary is a direct outcome of the big jump in bonus quotient rather than the actual salary component. Given the recent economic turmoil and the additional effort involved in getting the additional investment and customers, the additional challenges are being compensated by additional bonus payout. Even in the initial years and in relatively smaller hedge funds too, the starting range for hedge fund manager salary is relatively higher.
Even in the first year of a hedge fund, the bonus factor can make as much as $100,000 of the total salary component. This bonus keeps growing as you move up the hierarchy chain in any hedge fund. For junior staff like the hedge fund associate salary or even the hedge fund trader salary, the bonus helps spike up the salary. The bonus keeps getting added every quarter, or for that matter for every single transaction that happens. You would wonder how much revenue a hedge fund really generates to pay that much as a bonus in hedge fund managers average salary.
Well, you have to remember that most hedge funds get a major chunk of their income from the range of management fees that they charge. They take a cut from the basic profit. So the higher the return you deliver, the higher amount of money you would make. So in just 5-10 years, it is not difficult to make as much as $1 million as average salary in a hedge fund.
– Total Compensation of $1 Billion on an Annual Basis
You must remember that if you are starting your own hedge fund, the equation gets a little more complicated. For founders, it is no longer the salary bit alone. They have a relative amount of investment in the fund as well. As a result, they are also looking for a relative return on the investment that they have made. So, in that case, the owner of the hedge fund founder will keep whatever is left from the management fees after paying all the hedge fund salaries and the variety of expenses involved in the whole process.
However, the accuracy of estimates is absolutely debatable. There are too many variables in the entire game plan. Even for small hedge fund salaries, hovering around $70,000, the bonus component can make a total compensation of $1 billion on an annual basis. While the bonus component can crank up the salary many times, the variables can easily add to the complexities of deciding the hedge fund salary. Estimates indicate that higher performance fees and related hike in management fees yielded a significant increase in capital allocation by independent investors.
This also resulted in the creation of relatively stronger and bigger bonus pools. That together increased the overall compensation package created in an individual hedge fund. Recent data highlighted another interesting development. Entry level associated with hedge funds like hedge fund analysts got a 10% rise in the past 2-3 years. Hedge fund manager salaries for portfolio managers and other senior professionals increased in a far wider band, between 5-20% on an average.
The Hedge Fund Compensation Package
With the bonus element being only one part of the entire package, the next question is how exactly is the average compensation package created for the hedge fund salary?
Well, you must understand that the basic package for any hedge fund is entirely dependent on the overall performance of the fund. Unlike PE funds or mutual funds, the experience or location or for that matter, most other variable elements do not contribute substantially to the overall package. On a broad basis, estimates peg hedge fund managers average salary package close to $400,000 on an yearly basis. This data is collated from a variety of sources. It is often the amalgamation of different variables that come into play at various levels of professional experience. If you compare hedge fund associate salary or even the hedge fund trader salary with the hedge fund manager salary, the subtle points of difference are purely in terms of a variety of additional incentive.
A Reward to Compensate for Higher Sales
It is this incentive element or bonus that gets added to the overall package to boost performance. It is seen as a reward to compensate for higher sales. The compensation package for hedge fund manager salary is also rank dependent. However, the scale of progression could vary from firm to firm and location to location. A uniform rate is normally not the order of the day.
But on a generic basis, if you see, the ever burgeoning hedge fund manager salaries are indicative of another interesting trend. Though we have spoken of a dip in hedge fund profits in the background of the economic turmoil that we have seen in the recent economic past, hedge fund manager salary outlines a different story altogether. In fact, these pay packages accounted for record $2.51 trillions close to the end of 2013. Estimates say that the industry, on the whole, clocked 5-10% rise in the overall salary compensation packages created thus far. Therefore, demand and the willingness to be part of the industry cannot be denied in any manner whatsoever.
Gauging Hedge Fund Industry Growth
You might wonder that while discussing something like hedge fund manager survey, why it is important to take into account the Hedge fund industry growth in any way. This is important because the hedge fund manager salary is often a direct comment on the demand trend in this investment industry. Not only does it indicate the pace of growth, but it also highlights a perspective on the liquidity situation and the average gains that are being clocked on an average basis. The mathematics of this deduction is rather direct. Given the extent of the management fees that get translated as salaries, often it becomes the perfect guide towards probing demand scenarios and analyzing global trends in general.
In that context, it is rather interesting to note that the Hedge Fund Research Weighted Composite Index went up well over 5% in 2013 alone. This Index is a measure of the number of hedge funds which breached the high watermarks. In case you are wondering what this is all about, it is a performance progress report created by every hedge fund manager to decide whether or not they qualify for the broad bonus component. Compared to 48% hedge fund managers that reached this high watermark, the figure today is north of 70%. It is well indicative of the huge change in trend that we have been noticing thus far.
– An Increased Rate of Hiring
Hiring too has seen a significant increase. Higher hedge fund manager salaries coupled with an increased rate of hiring highlight the strong connotation between growth and higher earning prospect. In the aftermath of the severe global economic crisis in 2008, hiring trends have highlighted another interesting correlation between hedge fund manager salary and the relationship with the demand scenario. Compared to most other investment instruments, the adversity that the economic crisis brought forth the investment world actually turned out to be a big boon for the hedge fund industry. The hedge funds that managed to churn out positive returns despite the mayhem and the hedge fund managers who sailed the ship smoothly despite the obvious challenges became the talk of the town.
It is needless to mention that hedge fund manager salaries too reflected this development. Increasingly candidates, who battle the storm and came out winners, began to be in demand. The compensation package for these managers set an altogether different kind of benchmark in the hedge fund industry. Risk and risk management became the crucial monitorables. As risk limits continued to remain tight, hedge fund manager salaries began to enjoy the additional advantages. Even while compensation packages decline in the rest of the financial world, there hedge fund story projected a completely different picture.
The Different Factors Impacting Hedge Fund Manager Salary
That said, you can say that there are broadly 5 factors that determine the hedge fund manager salaries. The most prominent ones amongst them is
The country and city where your hedge fund is created is undeniably one of the biggest factors contributing to the pay packages of professionals in the industry. Think about it logically; the payment structure that might be the norm in New York can never match that of Iowa. Therefore, though you might create a hedge fund in a particular location on the basis of the demand, that won’t impact the salary structure directly. It is intimately related to the location and the average financial industry salary structures.
Whenever we set about creating the perfect hedge fund, a lot of stress has been given on the strategies evolved there. The popular argument is that the return from a particular hedge fund is closely linked to the incorporated hedge fund strategies. Well, in many ways, the hedge fund analysts salaries or for that matter, hedge fund traders salary, will depend on the management fees that they will be able to charge from their investors. It directly impacts their profit and hence the salary package.
3. Asset Type
Unlike investment banks or mutual funds, the asset class often plays a key role in deciding the kind of hedge fund salary that you can expect. While despite the difference you might be earning in millions, the fact remains that many times, hedge fund salaries have a strong correlation with the asset class. Different asset classes have different challenges and different cycles of going up and slipping. It is needless to mention that hedge fund salaries mirror that quite aggressively.
For example, when stocks are going up, gold or crude might not necessarily rise as well. Moreover, the appeal of hedge funds representing different asset classes is different. More often than not, that decides the total number of investors that a fund can attract. In many ways, that is a key determinant.
4. Global Trends
It is currently a global village. What happens in Tokyo can have its ramifications in Timbuktu as well. This is the reason; today hedge fund manager salary is so closely linked to the overall demand and supply scenario that you see across the world. The whole idea is if salary component has increased in Tokyo or have flattened out in New York, then a hedge fund in Brazil will also feel the heat and may even have to live with the ramifications associated with it.
Hedge Fund Manager Salary: Perception & Reality
Well, the fact remains that hedge fund manager salaries are decidedly one of the most talked about subjects in the financial world. The multi-million dollar compensation packages, the additional perks and benefits and the lavish lifestyle can also be a source of envy for professionals in many other walks of life. Imagine this; the average American salary is close to $43,000 and now compare with hedge fund managers average salary. It is close to $1.2 million.
That is nearly three times on an average. Even for juniors in the professional, like hedge fund associate salary or hedge fund analyst salary, it is close to $500,000. However, in this case, this range can see wide swings. They could be anywhere between $80,000-500,000. In fact, in 2011, the Forbes article on the highest paid hedge fund managers highlighted Raymond Dalio’s case. His annual compensation package was $3 billion, and that averaged a little less than $1 million per hour for him. Not just that, the same survey of hedge fund manager salaries highlighted the case of 10 managers who averaged close to $200 million.
However, the hedge fund industry also highlighted a phenomenon that is often seen in the case of sports. The winners take the maximum of the booty. As you go down the ladder, the wins keep decreasing. As you reached closer to the 40th manager on the list, the average slipped to $40 million. But even at that, it was a huge amount of money and speaks volumes about the average hedge fund manager salary.
– Compensation Packages of Senior Professionals
Another rather interesting fact about hedge fund salaries is the major chunk of the profit goes in compensation packages of senior professionals like hedge fund manager salary. That said, even the pay for junior staff like hedge fund traders salary, hedge fund analyst salary can be rather attractive. In most cases, it is lucrative enough to convince freshers to get into this career. Especially in the aftermath of the 2008 financial crisis, there are many hedge funds which came out relatively unscathed from the entire mayhem that led to a bloodbath across asset classes.
That as I mentioned earlier created a strong and robust platform for their steady growth. But you must remember that at the junior level in a hedge fund, the pay is good only in comparison to many other professions. However, if it is the big bucks that you set your eyes upon, you have to target the plush positions in the hedge fund firms. So with a bit of luck and lot of hard work, if you can seal your position in the first 5-8 years in the hedge fund industry, the moolah is there for you to enjoy. The billion dollar club is never a far cry when you are training to make the profit when markets are rising as well as when stocks are falling.
Hedge Fund Analyst Salary
I am sure after such detailed chat about the relatively lower pay scale of those who are towards the bottom of the hierarchy ladder in hedge funds, you would want to know what is the hedge fund analyst salary.
So if you have two or three years experience in investment banking and you want to switch over to hedge fund, will you be making more money or less?
Would the shift be worth the effort? While data estimates point to a rather wide range, the fact remains that the compensation package is dependent on some key factors.
- Asset Class
- Extent of coverage
The overall compilation of hedge fund salaries would reveal some rather interesting findings and key data about hedge fund salary. Not only would you get a clear perspective about the broad salary structure, but the kind of position in hedge fund industry that can yield attractive compensation packages.
1. $165000 or Higher
If you are looking for the ideal hedge fund analysts salary, those on the buy side can expect a billing rate of $165000 and northwards. In five years, the hedge fund manager average salary can rise to $250,000. Now compare this to an investment banker’s compensation package close to $160,000. But you must remember investment banking is relatively more challenging mentally and involves a lot more active management of funds.
2. At the Junior Levels
At the entry level and junior levels, the hedge fund salary is not terribly high compared to investment banks. It keeps rising as you grow up the ladder in the hierarchy chain. In fact, it is only when you move up relatively higher and occupy senior positions that the difference is evident in a pronounced manner.
3. The Salaries Move Up
The hedge fund salaries move up perceptibly higher as they move up the chain. In short, titles and promotions directly result in hiking of hedge fund salaries. For a clear perspective of the hedge fund analysts salary, the most pronounced jump happens when you get promoted as a Senior analyst from a junior analyst. The next and even more pronounced upmove is seen when you get promoted to an executive role as a hedge fund manager. As you become the fund manager, the hedge fund manager salary becomes a lot more about the bonus component as compared to the main salary package.
4. Asset Under Management
It is true that hedge fund salary is linked to AUM, but that does not mean that the larger the asset under management, the better. It is relative to a lot of other factors as well. You must understand from where this larger AUM and better hedge fund salary concept came. It was essentially derived from the notion that the larger AUM would mean that stock is pretty deep-pocketed and by that extension, hedge fund managers salary would be relatively more generous. By larger AUM, I am referring to hedge fund salaries in firms that manage $5-15 billion on an average.
But you have to understand that these large firms are also less expansive in nature. You already have a large number of people working and therefore limited scope of growth. If you compared that to a hedge fund with a lower AUM, it would be not just smaller but also extremely dynamic in nature. The strategy is more aggressive, and the work culture is relatively lot more growth focused. Therefore, in certain stages, the growth in hedge fund salary in these relatively smaller hedge funds can be relatively higher.
Location plays a critical role in deciding the hedge fund manager salary that you can expect. The compensation package in New York and San Francisco is 25-30% higher than what hedge fund managers salary you can expect in Washington or Boston. If you compare the same with Chicago, it could be even 40% higher at times.
6. Sometimes 30% Higher
In terms of hedge fund managers salary, there is another primary misconception. Often it is believed that those analysts who are on the equity side, perhaps make more money than what you would get on the credit side. Post the economic crisis in 2008; this fact does not hold longer anymore. In fact, hedge fund analysts salary for those on the credit side is sometimes 30% higher than equity analysts.
While in pure salary terms, the hedge fund managers salary is not significantly higher. But then why do we feel that they earn far more than conventional equity market analysts? Well, it is the bonus component that makes all the difference. Sometimes this bonus is 50-70% higher. This is how the hedge fund managers salary is so radically high compared to a lot of equity market fund managers. They might be putting in almost the same or more effort in the whole deal but the bonus wins the game.
8. Lucrative Compensation Package
Whether you like it or not, hedge fund manager salary in many sectors is lot higher than others. For example, if you compare sectors like consumer media, automobiles and healthcare sectors, they decidedly have a more lucrative compensation package. In fact, the bio-pharma saw the biggest rise in hedge fund manager salary.
Hedge Fund Manager Salary Is Closely Dependent on Several Factors
Therefore, we can easily conclude that the hedge fund manager salary is closely dependent on several factors. The location, AUM and the sector play the most important role in deciding the hedge fund manager salary. However, more than the exact extent of the salary, what makes a huge difference is the bonus factor. Invariably, the bonus makes the hedge fund managers salaries appear so huge compared to traditional investment bankers. So whether you are considering the hedge fund analyst salary or the hedge fund trader’s salary, it is the bonus factor that you must pay key attention to. It goes a long way in deciding how significantly higher you can earn as a hedge fund manager.