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Hedge fund pay slumps as returns dive

Date: Thursday, October 27, 2011
Author: Katya Wachtel, Reuters

Poor returns at hedge funds are hurting owners and senior investment professionals as heavy losses eat into the hefty incomes the industry is famous for.

Compensation at hedge funds, long known for being among the highest in the finance industry, is down about 10 percent this year, according to a report compiled by Glocap and Hedge Fund Research and released on Tuesday.

The drop "is primarily the result of the decrease in average fund performance in 2011 vs. 2010," the report said.

Hedge fund returns have plunged this year as managers and traders were tripped up by the European sovereign debt crisis, whipsawing commodities prices and a stagnant U.S. economy. The benchmark HFRI Hedge Fund Weighted Composite Index was down 5.3 percent through September.

Hedge funds traditionally pay so well because managers charge a management fee plus a performance fee. Those who run the funds can reap millions, even billions, in compensation. Last year, for example, John Paulson of Paulson & Co earned $4.9 billion, and Ray Dalio, who runs Bridgewater Associates, pocketed $3.1 billion. Lesser known managers at small funds can still earn millions of dollars a year.

For many underperforming funds, pay would have been worse were it not for continued growth of total industry assets in 2011, which reached a record $2 trillion in the first quarter. This increase generated higher management fees and a bigger income pool for employees, offsetting sagging incentive fees, the report said.

Senior investment professionals and fund owners experienced the deepest cuts on average, while those working in marketing, investor relations, accounting and compliance experienced a small increase in their pay.


Funds have also been slower and more cautious in recruiting new talent, the Glocap report said, a change noticed by many headhunters in recent months.

"Now that it's a buyer's market, funds are willing to wait for the perfect candidate," said Kyle Ramkissoon, a principal at recruitment firm IJC Partners. An abundant supply of good talent has kept a check on compensation even when returns have been solid, recruiters said.

"Another reason right now that a lot of hedge funds are holding back from hiring, is that they don't know what their redemption picture is going to look like," Ramkissoon said.

Most hedge fund investors have until October 31 to submit redemption notices to hedge fund managers if they want to pull their money out by year's end. After this time, firms will have a clearer picture of the funds available to bolster their ranks.