Peloton aside, hedge funds' 'high-water mark' system for fees means bonuses across the industry could sink to new depths this year.
Hedge funds' fee structure is coming home to roost in a way that's liable to impact pay, particularly at smaller houses.
Most, if not all, funds charge two kinds of fee - management fees amounting to 1.5%-2% of assets under management and a more meaty performance fee, typically 20% of profits.
However, consultants to the industry point out that performance fees are payable only above 'high-water marks', which require funds to recoup previous losses before they kick in.
"If a fund starts out worth 100m and declines in value to 80m, there will be no performance fee payable until the fund hits 100m again," explains one consultant to the industry. "Otherwise, you could get a fund that declines to 50m and then rises to 60m claiming a 2m performance fee, even though its investors have lost money."
High-water, low bonus
The system is bad news for any hedge fund that has lost money over the previous 12 months.
The problems at London-based fund Peloton, whose 70 staff are in danger of losing their jobs as well as their bonuses following a fire sale of 1bn of ABS assets, are obviously more acute. But with hedge funds reportedly having the worst January for five years, fears that high-water marks won't be met are spreading.
Fortune magazine, for example, highlights the plight of AQR, a US hedge fund which has lost $1.1bn on $4bn and is now considered in danger of losing staff.
Claude Schwab, a headhunter at US-based Schwab Enterprise, says high-water marks are the issue of the moment. "Almost all funds have these clauses and most candidates are very aware of them."
The good news is that Schwab says the absence of performance fees is unlikely to dent pay at larger funds, which can typically afford to pay generous bonuses based on management fees alone. "What we are expecting is a massive brain drain from smaller funds to larger funds," he says.
Peter Elliott, director at hedge fund recruiter Emerson Chase City in London, says candidates are already more careful about which funds they work for: "Funds with a multi-strategy approach and diversified portfolios are the most attractive."