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Now that markets have picked up, clients are coming back to hedge funds, and returns can be made by riding the market back up,

but there is still much to be unsure about. The result has been a state of confusion for many in the hedge fund industry.

On the one side, there are investment opportunities to be made from the crisis, and on the other, growing assets under

management and having a middle to long-term strategy has been difficult.

This state of uncertainty has been reflected in the compensation packages of hedge fund employees. Base salaries, on average,

have increased slightly, but a closer look reveals a distinction between the haves and the have-nots. Those employees of the top

performing funds are earning more than the rest of the industry, naturally.

But positive performance seems to have only a positive impact on the salaries of those employees that make investment decisions

like portfolio managers, traders and quant programmers. The gap in salaries between top management and back office employees

is increasing, even CFOs and some director-level team members took a pay cut this year.

Even in the most challenging market this generation of investors has ever seen, the drive for more continues. As we have seen

before, as the market improves, overall satisfaction with hedge fund compensation decreases. Interestingly, those at the bottom of

the salary scale are happiest with their package ± likely due to limited job market opportunities. But mid-tier employees are

expressing disdain with not having more equity and more money.

While the number of hours that hedge fund employees are now working has not increased since 2007, there is a sense that the

stress of the financial crisis and general uncertainty surrounding the future of the global economy is causing some hedge fund

employees to question whether their compensation suitably reflects the environment.

  


Hedge Fund Jobs Digest surveyed hundreds of fund managers and employees over October and November 2009 to benchmark

compensation practices. Respondents were from the across the globe, with a concentration in North America, and include some of

the largest and most recognized hedge funds.

Among the respondents are Citi, Black River Asset Management, Deutsche Bank, Gartmore Investment, Gottex, Green Arrow

Capital Management and UBS. As is indicative of the industry as a whole, most respondents are from either smaller firms or small

groups within a large firm (in terms of number of employees).

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Despite the huge earnings of top fund managers often publicized by the media, most hedge fund professionals do not expect seven

figure compensation levels. The hedge fund employees surveyed in 2008 expected to earn $291,000 that year, and the actual came

in slightly higher at $296,000.

The financial crisis has had less of a negative impact on the salaries of hedge fund employees than in other areas of finance. While

many firms around the world are cutting costs and therefore compensation packages, the average expected level of earnings in

2009 for hedge fund employees is up by 14% year-on-year to $336,000 ± which is two years in a row of double digit increases.

More than a quarter of respondents expect to see an increase in their total annual salaries over 2009 of 15%, and 9% expect to

double their compensation from last year. That said, not all respondents were so optimistic. Nearly 20% of respondents expect to

earn less than in 2008.

The result is a polarization of compensation expectation. For example, the amount of employees expecting to be in the top pay

bracket of more than $1 million in 2009 has increased considerably. Almost 8% of respondents said they expect to earn more than

$1 million in 2009, compared to just 2% in 2008, and 1% in 2007. These optimistic expectations explain the increase in the average

expected level of earnings.

There are many differentiating factors which can impact compensation at hedge funds. On a personal level, the role, experience and

education of the employee will be a deciding factors. While on a fund level, the performance and size of the fund should determine

compensation.

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There has been an interesting shift in how various roles at hedge funds are compensated and it certainly pays to be higher up the

structure. When looking at an average hourly compensation rate, the most senior roles at hedge funds have seen significant

increases, while other employees¶ compensation has remained fairly stagnant, and in the case of back-office employees have even

witnessed a pay rate drop. COOs, CFOs and Directors experienced impressive increases over previous years.

Portfolio managers, quant/programmers and risk managers reported more moderate increases in hourly rates over 2008. Legal and

compliance officers and accountants saw their pay decrease on an hourly basis. This is perhaps explained by the increase in the

talent pool in the current hedge fund job market.

While firms had to pay a premium to entice skilled back office staff away from financial institutions, these roles have been the first to

be cut at the banks. Hedge funds therefore can now pay less to attract those staff. The large difference between salaries of top

management and other hedge fund employees was commented on by respondents, some of which complained of the lack of proper

alignment in compensation plans.

     
Bonuses are the key in analyzing hedge fund compensation, and, at the higher levels, more than double total cash compensation. In

the USA, UK and comparable countries, the average base salary in 2008 was $140,000, with a bonus of $172,000. It is the senior

roles that benefit most from bonuses. COOs on average receive the largest bonuses.

In 2008, the average bonus for a hedge fund COO was $383,000 taking average annual total compensation to $557,000. Directors

received the second largest annual bonus of over $300,000, andCFOs, the third largest at over $250,000. As expected, total

compensation is considerably lower among back-office employees that have been ³off shored.´ Hedge fund employees in India, for

example, earn a fraction of those in North America and the UK.

Interestingly, some of the lowest base salaries go to quantative analysts and programmers but generous bonuses of approaching

$200,000 in 2008 bumped up their total compensation. The ranges in salary in each role, however, vary largely from firm to firm.

 !   

Each hedge fund interprets roles within the firm differently. Roles can have differing responsibilities and can require different skills

and experience from fund to fund. Smaller and start-up funds would be expected to have lower compensation packages along with

lower bonuses. For example, Directors that responded to the survey reported total compensation packages for 2008 to range

between $125,000 and $3.5 million ±the highest compensated role. Analysts and Portfolio Managers also reported large variations

in total compensation.

Analysts can earn as little as $36,000 on the low end, and as much as $1 million a year on the high end. Portfolio managers earn

between $34,000 and $2.2 million. It is clear that benchmarking by title alone does not paint a clear picture of cash compensation.

You must take into account responsibilities, fund size and performance in order to get a solid benchmark number. How can this be?

Remember, a start up fund is also a start up business, which means, in the early months, founders do not have the luxury of high

levels of compensation, if any at all.


  
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Back-office employees are expecting little to no increase in 2009. While Directors and CFOs were among the top earners in 2008,

those that responded to the survey report that they are expecting a double digit pay decrease in 2009. The average director salary

expectation for 2009 is about $100,000 less than they took home in 2008. The average expected compensation for a CFO for 2009

is $410,000.

Those expecting the largest percentage increases are those involved in the investment process ± portfolio managers,

quant/programmers and traders. The average total cash compensation of a portfolio manager in 2008 was $390,000.

These same Portfolio Managers expect to see a big increase in 2009 in total compensation to nearly $600,000 as reward for their

performance in a difficult market. Traders are expecting a 50% bump in their compensation to an average $340,000 this year. And

quants and programmers are looking forward to a six figure pay increase. Are they right to expect such increases? Does their

performance support such increases? The data does not provide a clear cut answer.



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Returns among hedge funds over the last 12 months have been extremely varied. Close to 45% of respondents report their funds to

be down last year. More than 20% of those hedge fund employees surveyed say their fund was down between 10% and 25%.

But 25% of respondents have enjoyed returns of more than 10%. Such variation is to be expected given the volatile investment

environment since September 2008. Shorting strategies may have benefited initially, but as markets have risen since March 2009, it

is long investment strategies that would have seen the greatest performance.

Essentially managers have had to remain flexible in their strategies in order to quickly adapt to the changing markets.

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Assets under management are also a significant contributor to performance. Nervous end investors pulled money out of hedge

funds over the financial crisis which, in many cases, forced the realization of losses. Towards the middle of 2009, however, investors

returned from the sidelines and hedge funds once again had net inflows which enabled portfolio managers to get back to the

business of investing.

It is largely believed that compensation is tied to fund size and performance. Given 55% of hedge fund employees¶ total cash

compensation is bonus related, performance and increases in assets under management are key. If a fund performs well, bonuses

will naturally be higher as hedge funds charge a performance fee which is passed on to the employees. That is clearly how portfolio

managers, traders and quant/programmers view it.

Only at those funds which reported stellar performance of returns upwards of 25% do differences in compensation truly emerge, and

fit the perceived notion that better performance results in better compensation. Respondents at those funds report earnings of

almost $500,000 on average.

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Yet the results of the survey indicate that hedge fund performance has less of a bearing on overall compensation that one might

think. The average employee does not seem to be impacted. Employees who work at funds that have had returns from flat all the

way to positive 25% report little difference in earnings, taking home between $260,000 and $280,000. Yet employees at funds that

that produced negative returns of 1% to 25% earned more than those employees at firms in positive territory ± between $290,000

and $390,000.

We saw a similar disconnect last year, where the highest pay was at the flat fund performance level. It is a bit more concerning in

this year¶s results as the actual pay was higher when funds lost money. We believe that, just as many of the respondent have

commented, compensation policies are not based on purely objective criteria and do not always align with the best interest of the

investors.

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In some cases, it could be simply a function of talent retention. In tough markets, the most talented team members are more open to

changing firms in search of higher pay. Some firms may break the connection between current fund performance and bonuses in

order to keep these players happy. Finally, guaranteed bonus programs, although discouraged, surely contribute to the disparity.
°    ° 

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In the search for higher compensation, hedge fund employees may assume that the larger the fund, the higher the rewards. The

results of the survey, however, show this not to be the case for all roles.

Analyst salaries remain virtually flat at funds with up to $1 billion in assets under management. Unlike last year, we found this year

that funds with more than $1 billion AUM paid higher total compensation. Analysts responding to the survey earned three times

more at funds of more than $1 billion than at those smaller.

Traders also benefit from being a $1 billion plus funds. Once again this year, we found that the lowest paying firms for traders are

those funds which have between $100 million and $500 million in assets. In this case, traders would actually be better compensated

at a smaller firm .

Similarly, while salaries across the board tend to be higher at funds with more than $1 billion in assets, this is not the case for those

in Portfolio Manager jobs. For the second year in a row, Portfolio Managers reported far higher earnings at funds with between $500

million and $1 billion in assets. The ³bigger is better´ scenario simply does not apply Portfolio Managers.

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In addition to size of assets under management, size of group in terms of employees also impacts compensation. Reported salaries

are highest at groups with between 10 and 100 employees. Last year, the average total salary for an employee in a group of

between 50 and 100 employees was just over $500,000 and dropped to $460,000 in 2009.

Compensation is lowest in the largest groups as duties can be segmented and roles kept very specific. It seems the smaller the

group, the more volatile the compensation scheme. Again, a reflection of small firms truly being run like small businesses.


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The typical path for MBA graduates into a hedge fund is to take on the role of analyst, and work their way up to portfolio manager.

On average, respondents with an MBA earned almost $50,000 more than those without and over $20,000 of that came in the form

of base compensation. Beyond the pure earning potential, we find many of the current hedge fund jobs in the Hedge Fund Jobs

Digest¶s database require an MBA.

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The hedge fund industry is still relatively nascent. The vast majority of those surveyed had been employed in their current firms less

than five years, and most had less than five years of hedge fund experience. Only 4% of respondents have been working in hedge

funds for more than 15 years.

Amount of hedge fund experience also impacts opportunities for equity in the firm. 17% of employees with less than two years at a

hedge fund are offered equity participation and 65% of those employees that have been with the firm longer than 20 years hold
equity in the fund. This is presumably because many individuals with that much experience are founders of the firm. There is little

difference in equity participation opportunities for employees, however, until they have been with a firm more than 10 years. 70% of

respondents had no equity stake at all.

As would be expected, it is the senior roles that are most likely to have equity in the firm. More than half of managing directors,

portfolio managers and CFOs have equity. The survey revealed that traders are now increasingly being offered equity. For the first

time in three years of data, the percentage of traders with equity in the firm exceeded the 20% mark.
     


The majority of respondents said they were granted three weeks or more of vacation time in 2008 but only took 75% of that time off.

Interestingly, fewer respondents said they were granted no time off in 2008. Hedge fund employees are still not taking their full

allowance of vacation time, however, opting to take just 75% of their vacation earned. Players in hedge fund jobs on average take

about 2.5 weeks of vacation time each year.

Once again it is the senior employees that appear to have the longest vacation allowances, and they are not afraid to take it. Those

that took more than six weeks in vacation were employees earning more than $450,000. Following cultural differences, hedge fund

employees in the UK earned more vacation than those in the US. On average, UK employees earned 4.6 weeks of vacation time

over 2008. Salaries, however, were on average $10,000 lower than those in the US.

  .      

 

The stress of the markets seems to have affected the sense of work and personal life balance. Fewer respondents now claim their

work and personal life balance to be excellent. Indeed, this year only 36% of respondents rated their work and personal life balance

to be above average. In 2008, almost 44% made this claim. This dissatisfaction is not a result of increased hours. The hours worked

in 2009 do not differ from hours worked before the financial crisis began. The majority of hedge fund employees work a 40 to 60

hour work week, with the most common response being 50 hours a week.

However, respondents now seem to feel that they are not being compensated appropriately for the amount of work they are doing.

Perhaps the more stressful environment during the financial crisis, while not increasing hours, has made employees feel they should

be better compensated, or has affected their personal lives.

It does pay to work longer hours, however, as those who reported working 70 hours a week also reported higher salaries than those

on shorter workweeks. The jump in income from 50-60 hours to 70 hours a week resulted in a 27% increase in total compensation.

/ " +  !    

As intimated, the results of the survey indicate a growth in the level of dissatisfaction with compensation among hedge fund

employees. Last year, 58% of survey respondents said they were unhappy in their roles. That percentage has since increased to

61%.

Given the disparities between salaries of top management and back office employees, one would imagine that the latter would have

the biggest gripe, but the survey reveals a different story. Accountants and legal and compliance officers within hedge funds are
among the happiest when it comes to compensation levels. COOs and directors which are among the top earners at a fund are

predominantly dissatisfied. Analysts, however, are the unhappiest of the lot. Only 20% of analysts surveyed said they were happy

their compensation.

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Hedge Fund Jobs Digest