(November 12, 2012) – Compensation is up and performance is down at hedge funds globally this year, according a new study of bonuses and total pay packages.
“2012 has proven to be a better year for the hedge fund industry,” said the report by hedge fund executive search firm Glocap. “Performance is up compared to 2011, albeit still a modest level overall. The industry is still, however, struggling to prove its value proposition relative to index investing…Last year compensation was down overall, particularly for senior investment professionals and for owners of hedge funds but in 2012 compensation for both categories as well as all categories of employees increased modestly with a 5% increase being typical.”
US equity markets in particular have been enjoying a bull run over the past year and hedge funds have not, on average, been able to keep up.
In aggregate, hedge funds have returned nearly 11% less than the S&P 500 in the year to September 26, according to a Bank of America Merrill Lynch report. The roughly 8,300 active hedge funds have returned an average of 3.04% for the same period, according to the report, lagging far behind major public equities indexes. The S&P 500, for instance, has gained 13.97% in the same period. This is the third worst-performing year since a pre-merger Bank of America began tracking hedge fund performances in 1994.
Nevertheless, pay packets for hedge fund employees and owners at all levels have only grown year-on-year. Those at "mid-performing, mid-sized firms" earned an average $1.3 million in compensation, according to the report, while top performers at larger firms got more than double that amount.
The 2013 Glocap Hedge Fund Compensation Report is not a survey: rather, it takes into account placement data from searches the firm executes, input form Glocap recruiters familiar with compensation, as well as interviews with hedge fund managers and human resources personnel.
The report noted three major trends this year:
1) A continued consolidation of industry assets with the larger funds getting larger on average and managing a larger total percentage of the industry’s assets.
2) Profit-sharing becoming more common, particularly for investment professionals with defined strategies.
3) A slower, more cautious hiring environment for established funds where funds are slower to hire and are even more selective than in the past.
Finally, the study pointed out that the shift in the investor base away from high net-worth individuals to institutional capital has been another over-riding factor affecting the industry.