2011 Hedge Fund Scorecard: Performance Down – Bonuses Up

October 12, 2011

While it has been a dismal year for hedge fund investors, with little prospect of recouping their (average) 7.8% year-to-date losses, hedge fund employees are feeling a little more optimistic – not necessarily about the investment outlook, but, rather, about their year-end bonuses.  According to the most recent survey conducted by eFinancialCareers.com, 62% of hedge fund employees expect their 2011 bonuses to equal or exceed their 2010 bonuses.  Their optimism stems from the fact that, although hedge fund performance has been increasingly deteriorating throughout the year, fund inflows have been continuing at a healthy pace as investors are still looking for viable alternatives to a volatile and even worse performing stock market.

In the  third quarter fund managers turned in one of the worst quarterly performances in the history of the industry as

john paulson

John Paulson Source: http://www.nydailynews.com

measured by HFRI Fund Weighted Composite Index. The index was down 5.5% for the quarter which is only exceeded by the last two quarter of 2008 and one other in 1998. The perfect storm of double-dip recession risks and extreme market volatility fueled by the debt crisis here and in Europe has caught many fund managers off guard, with many placing their bets on a stronger recovery that would boost the stock market in the last half of the year.

Some of the most high profile funds have turned in the worst performances of the year, led by one of John Paulson’s funds which has fallen a staggering 47% this year. Reports are that all of Paulson & Co’s funds are down substantially this year. According to a report in Reuters, Paulson is bracing for the worst possible scenario he could face with the possibility of a mass exodus of investors eligible to redeem their shares between now and the end of the year. That could amount to as much 20% of fund assets walking away.

As part of that scenario, there are rumblings that many of Paulson’s top employees would join the walk as many are collecting on the last year of deferred bonuses.  Perhaps anticipating such circumstances, Paulson has recently changed his bonus structure from that of a four-year vesting schedule to a single payment in the year the bonus is earned.  That could keep key employees in place, especially since they, along with 62% of other employees in the hedge fund industry are optimistic that their bonuses will continue this year despite a horrendous performance. In the case of Paulson & Co. with over $30 billion of assets under management, the management fee is more than sufficient to keep everyone happy and in place, at least for now.

 

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