Hedge-Fund Pay May Fall 25% in 2009 as Fees Evaporate

Date: Wednesday, March 25, 2009
Author: Katherine Burton, Bloomberg.net

Compensation for U.S. hedge-fund employees may drop as much as 25 percent this year as the firms try to recoup last year’s investment losses.

The decline will cut hedge-fund paychecks to about half the record levels of 2007, according to estimates by Alan Johnson, founder of Johnson Associates Inc., a New York-based compensation-consulting firm whose clients include financial- services companies.

About 70 percent of the industry’s 6,800 so-called single- manager funds lost money in 2008 with the average fund dropping 19 percent, according to data compiled by Chicago-based Hedge Fund Research Inc. That means most clients don’t have to pay performance fees -- generally 20 percent of profits -- until the losses are made up. Many owners of the private partnerships will cover salaries out of their own pockets, or from pools set aside in previous years, to keep their best employees, Johnson said.

“Hedge-fund owners are doing it because they don’t have a choice,” Johnson said. “Otherwise, their investment staff isn’t going to get paid for three years.”

To recover the losses from 2008 and resume charging performance fees, managers will have to post gains of 23 percent. That will take more than two years, based on average industry returns of the past decade.

Fund losses and withdrawals have also reduced management fees, usually 2 percent of client assets. Industry assets fell 37 percent to $1.2 trillion from their peak in June, according to estimates from analysts at New York-based Morgan Stanley. Hedge funds, which are loosely regulated, cater to wealthy investors and institutions such as pension funds and endowments.

Average Pay: $794,000

The industry’s top earners last year were James Simons of Renaissance Technologies Corp., who took home $2.5 billion; John Paulson of Paulson & Co., $2 billion; John Arnold of Centaurus Energy LP, $1.5 billion, and George Soros of Soros Fund Management LLC, $1.1 billion, according to a survey published in the April issue of Institutional Investor’s Alpha magazine.

Average pay at hedge funds was $794,000 in 2008, down from $940,000 a year earlier, Alpha magazine reported. Johnson said that figure was low, though he declined to provide his own average.

Chief executive officers earned an average of $2 million last year, while chief investment officers made $1.4 million, according to Alpha’s survey. Senior portfolio managers took home $1.1 million and senior traders were paid $790,000.

Job Market

Pay for those hedge fund jobs was about twice as much in 2007, according to the magazine, with CEOs earning an average of $3.8 million, chief investment officers pulling down $3.6 million and senior portfolio managers getting $2.2 million.

Though salaries are tumbling, most hedge-fund employees don’t have the option of jumping to another firm to increase their paycheck.

Hedge funds may cut 20,000 workers around the globe this year, a record 14 percent of the industry’s jobs, according to estimates by New York-based Options Group. About 920 hedge funds, or about 12 percent of the total, closed last year, according to Hedge Fund Research.

Some firms will manage to keep paying employees because they put aside money during flush times. New York-based Maverick Capital Ltd., the hedge-fund firm run by Lee Ainslie, told investors at its annual meeting last year that it has a reserve fund that can pay all expenses, including salaries and bonuses, for at least three years. The flagship fund lost more than 20 percent last year.

Top Earners

Hedge-fund executives aren’t alone in seeing their compensation drop. Johnson estimated that bonuses at Wall Street firms will fall about 20 percent from last year’s levels, though salaries could double to cover some of that loss. A person making $250,000 in base pay last year could get paid as much as much as $600,000 this year, he said.

Below is a table of the industry’s top moneymakers in 2008, according to Alpha magazine.

James Simons, Renaissance Technologies $2.5 billion John Paulson, Paulson & Co. $2.0 billion John Arnold, Centaurus Energy $1.5 billion George Soros, Soros Fund Management $1.1 billion Raymond Dalio, Bridgewater Associates $780 million Bruce Kovner, Caxton Associates $640 million David Shaw, D.E. Shaw & Co. $275 million Stanley Druckenmiller, Duquesne Capital Management $260 million David Hardin, Winton Capital Management $250 million Alan Howard, Brevan Howard Asset Management $250 million John Taylor, FX Concepts $250 million

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net