The hard times of hedge fund analysts who were on $350k
Not all hedge funds are having a good year. While Citadel's Wellington fund has returned nearly 13% year-to-date, Schonfeld's fundamental equity fund has returned just 0.9%, and London hedge fund Pelham Capital has lost almost all of its assets.
As some hedge funds flounder, insiders say it's the hedge fund analysts who are suffering. Analyst pay, which is erratic at the best of times, stands to fall dramatically when portfolio managers underperform.
"Analysts can get a raw deal in the current climate," says one hedge fund insider. "All analysts want a bonus formula based on their own PnL contribution, but platforms (rightly) argue that if you're part of an investment team, it's not that straightforward to separate out your individual input." Even if you've suggested profitable investments, you'll usually be paid down when the team is down.
Dominic Mielle, a former partner at Canyon Capital, cut her teeth as a hedge fund analyst. She described her role as a competition with other analysts to get her ideas heard by the portfolio manager who actioned them as investments: "There is a defined amount of capital to be invested...If one analyst is gutsy and convincing enough to push for a $100 million investment, there’s that much less money for everyone else to use."
Not all hedge fund analysts are equal. The insider, speaking anonymously, says some analysts simply do grunt work at entry level across a narrow coverage range, others - like Mielle - have a broader remit and are trusted to develop their own investment ideas to bring to portfolio managers. At the top end of the analyst tree are the sub-portfolio managers who occupy a hybrid analysis/investment role.
Usually, though, it's the portfolio managers who have discretion over bonuses for the analysts they work with. In the current market, some portfolio managers are using that discretion to pay a lot less than before.
This is a problem because hedge fund compensation is highly bonus-weighted. "The base salary for analysts is in the range of £75k-£130k, so your lifestyle is very dependent on the discretionary bonus," says the insider. He adds that analysts who've become used to earning £300k ($350k) are suddenly having to make dramatic changes to their lifestyles: "When you've made £300k for a few years you get a nice house, send your kids to expensive schools and live the lifestyle. But then you're suddenly down to only £100k and are facing the prospect of being laid off. It's a lot of pressure very quickly."
While the average person's sympathy is likely to be stretched thin, analysts' plight is a reminder that big hedge fund pay packets are not distributed evenly.
Complaints about hedge fund analyst compensation are nothing new. Writing on eFinancialCareers two years ago, one hedge fund analyst said he was "generally underpaid in every situation" and that greedy portfolio managers took all the money when times were good and when times were bad. Similarly, a thread on Wall Street Oasis a few months ago lamented that hedge fund analyst compensation is so erratic that analysts can't afford families: "Do people just defer families in the industry or find a partner with a steady job?" asked one analyst in an event driven fund.
The conclusion on WSO seemed to be that if you want to be a hedge fund analyst, you'll need to learn to live off your base salary and not to depend upon your bonus. However, there may be another way: find a portfolio manager who's fair.
"It's not all skullduggery," says the insider. "There are plenty of decent people who are portfolio managers. In the bad times, some PMS will effectively pay out of their own pockets to keep trusted analysts in the hope that they can turn things around."
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