A career in a hedge fund is one of the career paths that draw the most attention. Hedge fund managers are often portrayed in Hollywood blockbusters, and their lavish lifestyle is a dream for many. But, a frequent question that is usually left in the dark is how much do hedge fund managers make?
This is a complex question, due to the compensation structure for every employee in the hedge fund. Many factors can impact the salary of a hedge fund manager, including the asset under management size, the overall success of the fund, and the experience of the manager. When looking at potential figures they can greatly vary, between $100 thousand annually for a young manager in a small firm, to a couple of million in a large hedge fund.
Painting the wrong picture is something that we want to avoid, so for the audience to better understand this difficult topic, we will present all the crucial information. By the end of the article, you will not only understand what factors influence hedge fund manager's salaries, but you will know what should be done to earn them.
Key Takeaways
- Three characteristics have a major impact on a hedge fund manager's total compensation - location of the fund, size of assets under management, and experience of the manager. Large hedge funds due to their higher AUM can offer higher salaries. Also, the better the fund performs, the higher the salaries.
- Depending on these factors, hedge fund managers earn between just above $100 thousand to tens of millions of dollars.
- Brushing up on skills like research, analysis, risk management, and market understanding is crucial for the success of a manager's career.
What Is A Hedge Fund
Hedge funds are in a way a unique investment vehicle on the financial landscape. They use a wide array of strategies that overlap with other investment vehicles including venture capital, private equity firms, and others.
They pool investment capital from accredited investors. To become an accredited investor, an individual or an institution must have a high net worth or a significant level of income. Net worth should be at least a range of $1 million, while the minimum annual earning requirement is $200 thousand ($300 thousand for married investors).
While more accessible funds to investors, like ETFs and mutual funds aim to replicate the performances of a referent index, hedge funds aim to beat them. To do so they are concentrated on generating alpha.
To achieve these high levels of returns hedge fund managers employ a wide range of strategies. Some of the most popular include global macro, long/short equity, high-frequency trading, activist investing, and trend following. Depending on the fund and the manager, they can use one or more strategies.
To boost potential revenues hedge fund managers rely on the use of leverage. With this comes the increased risk of capital loss. To counter those risks hedge fund managers develop risk-mitigating strategies.
What Is A Hedge Fund Manager’s Job
Just from looking at the massive size of hedge fund operations, and the complexity of its approaches it is not hard to guess that a hedge fund manager's job is not easy, to say the least.
Hedge fund professionals usually have an area of expertise - either a geographically bordered market, an asset class, or both. In those boundaries, he should monitor the market's landscape, potential events, and trends.
Research and analysis is another key operation of a hedge fund manager. They can conduct analysis from two directions: top-down, and bottom-up. The top-down approach includes looking at the big picture which includes assessing macroeconomic conditions and factors. Bottom-up analysis is focused on individual companies and researching their economic indicators.
From research and analysis, a manager should know how to generate several investment theses in case the market opens in a way that allows quick gains.
Besides making decisions around new investments, portfolio managers are also responsible for monitoring current holdings. Like with new investment ideas, the manager needs to know the situation revolving around the current portfolio. This includes understanding current trends, and how every company is fairing.
Sometimes managers need to act quickly and respond to a fast market change of direction. If the reaction is slow or absent, the fund can sustain heavy losses, or miss an opportunity to amplify gains.
Depending on the fund, some of them have allocated teams that are focused on risk management. In any case, managers do take part in creating and implementing risk mitigation strategies. These can include taking hedging positions, placing stop/loss orders, limiting liquidity levels, position sizing, portfolio rebalancing, and constructing a diverse portfolio.
Until now the job description of a hedge fund manager was on the investing process itself. The final piece of the puzzle includes the use of soft skills and is focused on investor relations. The portfolio manager through reports, letters, and meetings informs the investors about the current state of investments, and plans that are in the making.
Factors That Impact The Hedge Fund Manager’s Salary
At the beginning of the article, we mentioned that it is very difficult, and practically impossible to present a realistic pay range for the hedge fund manager position. The reasons for this claim are based on several variables that can heavily impact the pay range, including experience, the location of the fund, the size of assets under management, and the performance of the fund.
Regarding the United States, hedge funds based in New York, Massachusetts, and Connecticut offer best-paying manager positions.
Besides these locations being centers of financial markets, hedge funds based in those states are amongst the largest in the hedge fund industry. This factor is another reason that heavily impacts the salary of a manager.
Hedge fund managers' compensation is based on a two-tier system, the so-called 2/20. The 2% is referred to the fixed part of the salary which is taken from the AUM size of the fund. The larger the pool capital of the fund, the manager gets a higher salary. For instance, if the fund has $5 billion in AUM, the fund manager earns $100 million just through the sheer size of the fund.
The 20% in the formula is the performance fee which is based on the investment success. Managers have a success rate for every investment and position that is under their care. Once they place the investment the threshold is being placed on it. If the performance of the investment breaks through the threshold, the manager gets 20% of that figure.
That is why hedge fund managers are so highly competitive. The better results they produce, the more they earn. And that is not a small figure, and it provides a real reason to bring your A game.
How Much Hedge Fund Managers Actually Earn
When taking these factors into consideration it is a bit easier to understand why it is so difficult to make estimates about hedge fund managers average compensation. However, when looking at the base salary, a hedge fund manager's average salary is $120 thousand per year without bonuses. With growing experience, the salary is also much more competitive.
Experienced portfolio managers in large funds can earn tens of millions of dollars. But, do not get drawn by these figures. It only refers to top-tier executives who are managing large funds that are delivering constant gains.
How To Maximize Your Pay As A Hedge Fund Manager
To progress in the hedge fund career, a hedge fund manager must be highly focused on self-improvement. Usually, the career start can be from a smaller or younger fund that provides a lot of opportunities for learning. This is highly beneficial, and it is even better for a manager to start this way.
Through honing skills in funds that leave more space for creative input, managers are building a strong foundation for the rest of their careers.
Among the top skills that managers need to work on are financial analysis skills, risk management, understanding financial instruments, market insights, decision-making, and strategic thinking.
Analytical skills include the ability to analyze financial statements, market trends, and economic indicators. These are the bases for making sound investment decisions.
Risk management is an essential element of every hedge fund operation. Managers must know how to identify, assess, and manage different risks that are connected with investments.
Knowing to estimate market conditions, economic indicators, and industry trends is one of the crucial puzzle pieces needed for a successful investment decision no matter the strategy that the fund is using.
Before becoming a manager, most executives start as analysts. Already then they learn about financial instruments, like equities, fixed income, and derivatives. But, once they move to the managerial position, everything is pushed to a higher level, and so is the understanding of the financial instruments.
Decision-making skills can be extremely helpful when it is necessary to make a quick decision that can make a big impact. It is not uncommon that an opportunity arises in a very short time frame, and if actions are not taken quickly, it can be just another wasted chance.
Commanding these skills will dictate the success of a person in a hedge fund manager's career. If they are combined with a strong professional network, hedge fund managers can move up the ladder, and earn a higher salary.