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Hedge Funds Willing to Pay More for Risk Management

Date: Wednesday, June 7, 2006
Author: Susan L. Barreto, Hedgeworld.com

NEW YORK (HedgeWorld.com)—It pays to be a risk watchdog, and the pay scale can be enhanced a professional's experience, hedge fund ties and proximity to New York City.

On average, salaries among risk managers in the asset management field grew 5.5% in 2005, while cash bonuses moved up 20% and non-cash bonuses soared by 30%, according to Risk Talent Associates. In the firm's 2006 compensation survey, it becomes evident that seniority, the employer's investment offerings and that firm's location affect success in an era of growing preoccupation with risk management in the asset management industry.

According to the findings of the 2006 Risk Talent Associates' Professional Compensation Survey, a managing director/chief risk officer's take home pay likely grew by slightly less than the amount it would take to employ a junior risk analyst on an annual basis. A junior analyst last year could command $164,000 in total compensation (including bonus), while the typical chief risk officer made on average $960,000, or roughly $144,000, more than in 2004.

Risk Talent Associates, an executive search firm, interviewed more than 100 risk professionals in its survey from three different segments of asset management: alternative investments (hedge funds and funds of funds); traditional asset management and insurance.

Researchers found that chief risk officers at hedge funds and funds of funds are the highest paid risk specialists when it comes to total compensation. Much of the difference comes in the form of cash bonuses, which grew to total almost three times their average salaries, or $724,000, last year.

A chief risk officer at a traditional asset management firm received $795,000 in salary and bonus in 2005, while at a hedge fund firm the same post paid a total of $1.2 million.

Risk Talent officials wrote in their survey findings, "Chief Risk Officers earn the highest cash bonus, as firms realize it is worth paying total compensation in the $1 million range to mitigate risk." They added that CROs can add value to the investment process as well as strong guidance on compliance and regulatory issues.

The difference in compensation across the asset management business can be explained by alternative investment firms luring top risk management talent away from traditional sell-side investment banks. Risk Talent's capital markets compensation survey released earlier this year showed big bonuses being paid at the banks, which officials said translates into higher compensation offerings from hedge funds attracting top talent going forward.

Nowhere is this more the case than in New York City, where the majority of the world's hedge funds reside. Ranked by geography, the top total compensation packages are in New York, followed closely by those in Asia.

Risk professionals at smaller firms also are expected to be paid more than those at medium-sized outfits. This is likely due to the fact that firms employing five or fewer risk management executives are generally hedge funds, Risk Talent officials concluded.

Risk Talent Associates is in the process of preparing additional compensation surveys in the areas of compliance and other fields such as software, consulting, energy and corporate.