It's hedge fund bonus season too. Deferrals are spreading
It's bonus season in banks, but this is not all. It's also bonus season in hedge funds. And while hedge fund bonuses used to be a simple issue, things have become a lot more complicated.
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If you work as a portfolio manager in a hedge fund you are typically paid a proportion of the profits you generate for investors. That proportion was traditionally around 20% of profits, but citing a report from Goldman Sachs, the Financial Times reported last year that it had risen to 24.5% for the best portfolio managers at top multistrategy hedge funds like Citadel, Millennium and Balyasny.
Hedge funds are incredibly secretive about their bonuses but industry insiders say most of the big multistrategy funds have announced bonuses already. Dymon Asia announced earlier this week. Qube Research and Technologies announced Tuesday. Resulting bonuses are typically paid before the end of this month, although some may drag into March.
Hedge fund bonuses are about more than the profit cut, though. Below portfolio manager (PM) level things are often more blurred. Juniors aren't on profit formulas. Analysts are often paid based on a more discretionary appraisal of their input from PMs (prompting complaints) and middle and back office staff get what remains.
Historically, hedge fund bonuses were paid in all cash. This is changing. While Balyasny Asset Management (BAM) still pays entirely in cash, other funds will sometimes defer.
At Citadel, for example, employees must invest half their bonuses above an undisclosed threshold into Citadel's Wellington Fund for three and a half years. At Qube, bonuses are discretionary and up to 75% are reinvested in Qube's funds for a three year period. At Point72, some employees have 25% or less of their bonuses on a three year vesting period. At BlueCrest (technically Mike Platt's family office), multiple sources say that three year deferrals are the norm. At Millennium, we understand that all-cash bonuses are the norm, but that some people may be on deferrals.
If you're a particularly desirable portfolio manager, your bonus may also include an "accelerator" in which you receive a higher proportion of your initial profits, as long as they are also generated within the bounds of a particular sharpe ratio.
Deferrals can be popular when investing into a firm's funds gives employees access to returns. However, the preferred hedge funds are often paying all-cash in the style of Balyasny Asset Management. "This is the selling point," says one portfolio manager. It's unfortunate, then, that deferrals and clawbacks are becoming more common.
Funds mentioned in this article either declined to comment or didn't respond to our queries.
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