What Is A Hedge Fund Manager Salary? | Hedge Funds News (2024)

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Are hedge fund salaries really that high? Every year, rich lists are published outlining just how many millions of dollars hedge fund CEOs have racked up on their personal fortune.

If you have watched the financial news lately, you will no doubt have heard about some of the so-called "Top Hedge Fund Managers" that take home hedge fund salaries that can exceed the GDP of several African countries. But, is the hedge fund business really that lucrative?

Are hedge fund salaries really that high?

Hedge fund pay is the stuff of legends. Every year, rich lists are published outlining just how many millions of dollars hedge fund CEOs have racked up on their personal fortune, leading to the perception that working in the sector is a fast track to riches.

The reality of hedge fund pay is decidedly more subdued. You will indeed do very well, but you're unlikely to retire to your own private island before you hit 30.

You have to remember that the top people in any field will make a lot of money, no matter what they are involved in - that's just the way the capitalist system works.

The key to getting rich in hedge funds is to progress beyond mere employee status and be brought into the partner fold.

Partners invest money into the hedge fund, and are generally subject to 'discretionary division' of any profits the fund makes each year. Some of this goes back into the company, but profit share is the fastest way of making big money.

Obviously, there's a hierarchy even here, but average pay often stretches into the tens of millions.

As an extreme example, it emerged recently that Chris Rokos, the 'star' hedge fund trader who left Brevan Howard to start his own fund last year, earned $900m over ten years working for the firm.

Salary of Early-Stage Hedge Fund Managers

When you just graduate from school, you can expect a pretty small salary if you can actually secure a position at a hedge fund. Now, it is important to preface this by saying that "small" hedge fund salaries are actually quite high for the general population - with bonuses, a first year hedge fund researcher or gopher can still make up to US$ 100,000.

There are almost no other fields that currently pay that well right out of school. But, as you start to progress into higher positions, hedge fund salaries grow and bonuses get bigger.

That is one thing you have to remember - since hedge funds procure most of their income from management fees and take a cut on the overall profit, the more money you have under management and the higher your yearly return is, the more money you will make.

It is not uncommon for someone with 5 to 10 years of experience (if they last that long) to secure hedge fund salaries that are close to US$ 1 million per year.

If you start your own hedge fund, though, hedge fund salaries get a little more complicated.

Usually, the founder of a hedge fund has his or her own money invested in the fund, so they will have grow their money in this way as well.

They keep whatever is left of the management fees and profits when all the expenses and hedge fund salaries of their workers are paid, so the above information doesn't really apply to them - they can make exorbitant amounts of money in a very short period of time.

To try and peg down any accurate information on hedge fund salaries is a futile task - there are just too many variables to consider.

Sure, we know people just starting at a small hedge fund can secure hedge fund salaries of around US$ 70,000 plus bonuses based on their performance, and that a top hedge fund manager can make over US$ 1 billion in compensation, (much like David Tepper of Appaloosa Management - 2009 earnings: estimated US$ 4 billion) but this information is not very helpful.

It is like asking how much a CEO makes, there is just too much variation.

Hedge Fund Managers Salaries In The 2008 Crisis

As with any type of business, you will have good years and bad years. In the world of hedge funds the bad years can be translated into slightly smaller salaries, but still far above the average of other industries. Take as an example the salary of hedge fund managers in the year of the most recent international financial and economic crisis.

Consider this list of the top-earning hedge fund managers of 2008, as reported by Alpha Magazine:

If you're motivated by the prospect of a very big payday, those numbers will be inspiring.

But the information below will be a little more useful.

Hedge Fund Salaries: From Risk Manager to Hedge Fund Manager

The first thing to realize about the pay at hedge funds is it is largely about how the fund performs.

Therefore it's the size of your bonus more than your base salary that determines how well you do overall. And bonuses paid for a given position are often explicitly tied to the fund's performance.

In general, if the fund's return is stellar, your bonus will be too. If it sucks wind, so will your compensation.

That is, if you're lucky. Often, if the fund does badly enough, you will simply be out of work.

No matter how skilled you are, or how difficult overall market conditions are, if you work for a hedge fund that loses a significant amount of money you will likely lose your job.

The second thing to realize about the pay at hedge funds is that the principals and senior portfolio managers take home most of it.

The pay for more junior positions in successful hedge funds can be extremely attractive, as the tables below show.

See Hedge Fund Salaries

But if you're after the really, really big bucks, what you're gunning for is to become a senior portfolio manager or run your own fund.

And that'll take some time, experience, skill, and hard work.

How to Calculate the Salary of the Hedge Fund Manager?

To better understand hedge funds and why they have become so popular with both investors and money managers, let's set one up and watch it work for one year.

I will call my hedge fund "Global Master Fund, LLC." My operating agreement - the legal document that says how my fund works - states that I will receive 25% of any profits over 5% per year, and that I can invest in anything anywhere in the world.

Ten investors sign up, each putting in $10 million, so my fund starts with $100 million.

Each investor fills out his investment agreement - similar to an account application form - and sends his check directly to my broker or to a fund administrator, who will record his or her investment on the books and then wire the funds to the broker.

A fund administrator is an accounting firm that provides all the administration work for an investment fund.

Global Master Fund is now open, and I begin managing the money.

Once I find attractive opportunities, I call my broker and tell him what to buy with the $100 million.

A year goes by and my fund is up 40%, so it is now worth $140 million.

Now, according to the fund's operating agreement, the first 5% belongs to the investors with anything above that being split 25% to me and 75% to my investors.

So the capital gain of $40 million would first be reduced by $2 million, or 5% of $40 million, and that goes to the investors.

That 5% is known as a "hurdle" rate, because you have to first achieve that 5% "hurdle" rate return before earning any performance compensation.

The remaining $38 million is split 25% to me and 75% to my investors.

Based on my first-year performance and the terms of my fund, I have earned $9.5 million in compensation in a single year.

The investors get the remaining $28.5 million along with the $2 million hurdle rate cut for a capital gain of $30.5 million.

As you can see, the hedge fund business can be very lucrative.

If I were managing $1 billion instead, my take would have been $95 million and my investors, $305 million.

Of course, many hedge fund managers get vilified for earning such exuberant sums of money.

But that's because those doing the finger pointing - often the newspapers - fail to mention that my investors made $305 million.

When is the last time you heard an investor in a hedge fund complain that his fund manager was getting paid too much?

Hedge Fund Manger Salary: The 2 and 20 Structure Still Prevails

From our fictional fund example above, it's evident that hedge fund managers earn a lot of money.

But what perhaps gets the most criticism is the most popular compensation scheme in the hedge fund world: it's called the "2 and 20," and it is used by a large majority of hedge funds currently in operation.

The 2 and 20 compensation structure means that the hedge fund's operating agreement calls for the fund manager to receive 2% of assets and 20% of profits each year.

It's the 2% that gets the criticism, and it's not difficult to see why.

Even if the hedge fund manager loses money, he still gets 2% of assets.

A manager overseeing a $1 billion fund could pocket $20 million a year in compensation without lifting a finger.

Worse yet is the fund manager who pockets $20 million while his fund loses money.

He or she then has to explain to investors why their account values declined while justifying getting paid $20 million.

It's a tough sell and one that doesn't usually work.

In the fictional example above, my particular fund charged no asset management fee and instead took a higher performance cut - 25% instead of 20%.

This gives a hedge fund manager an opportunity to make more money - not at the expense of the fund's investors, but rather alongside them.

Unfortunately, this no asset management fee structure is rare in today's hedge fund world.

The 2 and 20 structure still prevails, although many funds are starting to go to a 1 and 20 setup.

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