Compensation Survey: Banking on the Back Office

		(Illustration by Mitch Blunt )

Click here to fill out the 2013 Hedge Fund Compensation Survey.

Hedge fund professionals can still make big bucks — as long as they aren’t actually managing money.

In a year when many hedge funds performed poorly, people on the investment side at hedge funds saw their bonuses take sizable hits. But their colleagues in other areas — particularly technology, risk management, and marketing and investor relations — actually experienced big pay increases, according to AR’s annual hedge fund compensation survey. Risk managers and technology professionals are benefiting from a spate of new regulations with which hedge funds must comply, making their skills extremely important right now. At the same time, well-connected marketing and investor relations professionals are in high demand in what remains a difficult climate for raising assets. And hedge fund managers who are hiring don’t have to pay a premium for investment talent, since there are still plenty of people angling for open positions.

Hedge fund investment professionals experienced a 14.5 percent decline in their total pay, dropping from an average of $807,937 in 2010 to $690,786 last year, according to the survey. That’s not surprising in a year when the average hedge fund declined by 2 percent, since managers earn the lion’s share of their income from charging a 20 percent fee for performance. Performance fees are part of the compensation formulas used to calculate the bonuses that represent the majority of most investment professionals’ compensation. Consequently, total compensation, comprising salary and bonuses, for chief investment officers fell 27 percent on average last year.

“It’s been a very difficult and challenging compensation environment because an individual’s pay is tied into the performance of the overall fund,” says John Carley, president of New York–based executive search firm A-L Associates.

Chief technology officers fared better, however: Their total compensation rose by a stunning 85 percent, with average total compensation climbing to $594,286, from an average $321,429 in 2010. That’s thanks to new rules and regulations like the Securities and Exchange Commission’s Form PF, SEC registration and the Internal Revenue Service’s upcoming Foreign Account Tax Compliance Act. As a result, hedge fund firms have been scrambling to meet multiple new reporting requirements, and CTOs are in charge of the complex software and programs required for hedge funds to stay compliant.

“We have a ton of positions for IT, and most of them are developer roles, where we’ve seen an increase in salary levels,” says Susan Whitledge, a senior consultant with Chicago-based search firm First Associates.

Marketers also proved they have highly sought-after skills in today’s world. Headhunters say marketing, investor relations and other positions related to interacting with investors or updating them on a firm’s activities have become more important than ever as firms look to increase their assets under management or replace assets lost through redemptions or poor performance. In 2011, total compensation for investor relations officers rose an average of 18 percent, to $432,503. Business development officers’ pay also climbed 18 percent, to $536,556, on average.

“Compensation for many individuals — particularly those at underperforming firms — in the hedge fund industry was flat to down 10 percent last year,” says Lynn Tidd, who leads the hedge fund practice at New York–based global executive search firm Russell Reynolds Associates. “But the exception to the rule is that folks on the client side are in such high demand, their compensation continues to creep north. We’re seeing a ton of demand for marketing, sales, IR and product specialists — anything client facing.”

Total compensation for marketing directors and managers rose 17 percent, and marketing associates benefited from a 12 percent boost. Those numbers are poised to climb even higher in 2012, with the number of marketing positions available outnumbering the number of qualified candidates by far, according to numerous recruiters in the industry.

“Star marketers have fee participation or may be sitting on commission trailers for multiple years,” says Tidd. “There’s a big gulf between the top tier of marketers and the next tier down.”

Risk management is another area where compensation is rising and where headhunters say they are seeing a spike in the number of job openings, but it doesn’t necessarily pay to be on top. Though average total compensation for risk managers rose 11 percent in 2011, senior risk management officers experienced a 22 percent decline in their average total pay. Many firms are looking to save money wherever they can and have begun eliminating senior positions, folding their responsibilities into the duties of other related senior executives, such as chief financial officers.

“The higher-end positions are seeing more consolidation, and everyone is looking for talent to come in at the middle level instead of the senior level,” says Whitledge.

But even though many firms are trying to economize when it comes to compensating their staffs, headhunters say most are still willing to pay up to fill key posts that can help them attract more investors or generate better profits in the long run. Beyond marketing, headhunters are seeing increasing demand and higher salary potential for junior, midlevel and senior analysts, as well as for portfolio managers and traders with experience in distressed, credit, macro and quant strategies.

“Hedge fund managers are seeing some daylight for the first time in quite a long stretch and consequently looking to play some offense,” says A-L Associates’ Carley.

Hedge funds have been looking to Wall Street for talent, hoping to scoop up underpaid, disgruntled investment bank employees whose experience can easily translate to hedge funds. But headhunters say the flow of talent between the hedge fund industry and the sell side has begun to move in both directions. “Hedge funds have poached from the more traditional shops like the Goldman Sachses of the world, using the allure of greater compensation, accelerated career development and cultural entrepreneurship,” says Russell Reynolds’s Tidd. “What’s happening now is that a lot of the traditional asset managers have developed alternative strategies of their own. So, there is now a migration back to the larger asset management firms.”

For the most part, people in the hedge fund industry who remain employed are being very careful about jumping to new positions, even when their firms’ performance may be faltering. “Everyone will look if you have an interesting opportunity, and they’ll listen,” says Michael Cooke, a partner with New York–based search firm Execu-Search Group. “But they are moving with caution.”

The incentive to change firms has also diminished significantly. Just a few years ago, firms would buy out the deferred compensation package of individuals they were eager to hire, but these days switching firms often means walking away from those packages and leaving money on the table. Nonetheless, people haven’t stopped moving entirely.

“People are saying there are no jobs out there, but it’s not true,” says Steven Fleming, CEO of New York–based executive search firm Wall Street Options. “There are still superstars out there investing in various investment strategies, actively raising capital and building new businesses.”

Many big investment banks unloaded their proprietary trading desks to comply with rules introduced as part of the Dodd-Frank Act; this has created several new jobs, says Fleming. Some proprietary traders who suddenly found themselves out of work shifted their focus to hedge funds and began launching firms of their own.

Moving to a start-up means uncertainty in an environment where fundraising is harder than ever. But for employees at firms that are struggling and unlikely to pay well in the near future, many people still believe the potential for a better payout is worth that risk.

Methodology

AR’s 2012 Hedge Fund Compensation Report is based on the responses of investment and noninvestment professionals at nearly 300 hedge fund management firms in 27 countries. We asked each participant to provide his or her salary, cash and noncash bonuses, and total compensation for 2010 and 2011, as well as an estimate of 2012 earnings. Results were tabulated individually. All the responses are confidential. The total compensation includes salary and cash and noncash bonuses.