A Year of Living Dangerously:Hedge Fund Comp for 2012

January 22, 2012

As the snippets roll in from “Bonus Watch” at DealMaker.com, where top secret bonus data is leaked by Wall Street insiders in the month leading up to their actual payment, they appear to be confirming what we already knew; that 2011 bonuses would be down 20 to 30 percent. The early reports are coming in for associate level positions in which the bonuses are averaging about 15 percent less than 2010. It’s the partners who are expected to get the bigger haircuts with bonus reductions of as much as 50%. For the Wall Street banks, it could be the lowest level of compensation since 2008.

The compensation collapse on Wall Street is reflective of the dismal year across all business lines including investment banking, trading and asset management and exacerbated by the mounting pressures of new regulations, a weakened global economy, and their own depressed stock prices. And, as banks like Goldman, Morgan Stanley, UBS and Deutsch start in on drastic cost-cutting measures; the prospects for younger talent jumping ship have dimmed with a new attitude of gratitude for getting a bonus or compensation increase at all.  The trend of “under-appreciated” traders peeling off to start their own hedge funds continues albeit at a cautious pace as investors are becoming much more discerning in their investment choices.

The 2011 payout picture for hedge fund employees reflects more of flat lining of expectations than it does fund performance which has been uninspiring for a number of years. According to the 2012 Hedge Fund Compensation Report, hedge fund managers expected a decrease in bonuses for 2011 on top of an increase in their base salaries which materialized as a slight overall increase in compensation to $311,000. In spite of the across-the-board underperformance in the industry, hedge fund compensation managed to stay somewhat level due to the continued health pace of fund inflows.

Although individual hedge fund managers are not under the same, direct regulatory pressures as the banks, they are feeling an increasing amount of heat from investors who have shown a willingness to fire their managers. But, with viable investment alternatives limited, investors are not abandoning hedge funds altogether. Instead, they are repositioning their assets among funds that have demonstrated their ability to maneuver the increasingly volatile markets. Hence the net positive flow of funds over the year amidst some major outflows from some of the larger, underperforming funds such as Man Group and Paulson’s Advantage Fund.

But, if the net outflow fourth quarter of 2011, the first since 2009, is any indication of a trend, hedge fund managers may very well need to ratchet down their expectations for 2012. But that’s nothing that a double-digit return performance couldn’t remedy in a hurry.


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