Hedge Fund Fees and Compensation

July 1, 2015

Hedge fund fees are the highest in the investment management industry. The average mutual fund charges 0.90%. The average hedge fund charges 1.50% and 18% of profits. Hedge funds are such a profitable business model that Goldman Sachs and Blackstone are buying minority stakes in hedge fund management companies so they can get a piece of the fees.

The old saying, “You get what you pay for,” rings true: Hedge funds that charge more than 20% of profits are some of the highest performing funds in the industry. For some funds, 20% of profits is child’s play. In 2013, Steve Cohen’s SAC Capital charged a 3% management fee and 50% of profits. Cohen personally made $2.3 billion from this arrangement. In 2007, Renaissance Technologies charged a 5% management fee and 36% of profits. These are enormous fees.

One industry trend involves more advanced calculations of fees. Some clients are calling for fees based on alpha, which means the fund only gets paid if they beat their benchmark. The goal of this idea is to bring more accountability to the industry. Trent Webster, senior investment officer for strategic investments and private equity at the State Board of Administration in Florida, said, “We need good managers, not asset gatherers.”

High hedge fund fees mean high salaries for hedge fund employees. The 2015 Hedge Fund Compensation report, published by Job Search Digest, found that the annual average cash compensation for hedge fund professionals is $368,000, and their bonuses would be 54 percent of their total cash compensation. Leadership roles, often with much of their pay tied to performance via bonuses, tend to see greater variance between median and mean compensation levels.  Since most senior level positions are directly linked to fund performance, they have the potential to out earn their peers when they deliver value to investors.

HF Comp Report

The hedge fund industry will continue to prosper because money always chases the highest returns. The best hedge funds continue to attract the most money, turning the industry into one dominated by heavyweights. Bridgewater is in first place: they manage $169 billion.

Hedge fund jobs have become more competitive than ever. As the Volcker Rule prohibits banks from proprietary trading, traders at some of the largest banks are leaving to join hedge funds. Competing with the best will take every resource you have. This is why it’s important to use Hedge Fund Jobs Digest to help you seize the next opportunity.

Previous post:

Next post: