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Many hedge funds cannot afford to pay bonuses

Hedge funds are suddenly doing ok: returns are up, redemptions are down and they’ve had the best start to the year in a decade. Unfortunately this does not mean that they will be paying large bonuses.

Following closely on from last year’s disastrous performance, many hedge funds are still below the high water mark at which they can charge the 20% performance fees that become bonuses. Deprived of these, they’re having to make do with 2% management fees, which are themselves being compressed to 1.5%

None of this is good news for people hoping to get rich at established funds. “A lot of people are just deciding to give up and sit on beaches,” says John Godden at hedge fund consultancy IGS Group.

Examples of such behaviour apparently include Julian Barnett, who left hedge fund Polar Capital earlier this year for ‘family reasons.’

Instead of hanging on until the high water mark is reached and performance fees are available again, junior traders are leaving established funds and joining new set-ups without high watermark issues.

“Some managers are calculating that it could take 1-2 years to recover and they’re therefore better off jumping ship and setting up at a new fund that can afford to pay them,” says Christopher Miller, chief executive of Allenbridge HedgeInfo.

Comments (9)

Comments
  1. “below the high water mark at which they can charge the 20% performance fees that become bonuses,,”

    So, 20% performance fees for management of say, -10% returns in year 1 in the new venture should work out nicely for everyone concerned……

  2. No doofus, they charge 20% of any profit they make over the high water mark. As they haven’t hit the mark all they get is 2% AUM fee. I can see why you’re a former trader.

  3. Why should anyone receive a bonus for not returning above inflation? If you are running 0.5 bn you should be able to easily accomodate a headocunt of 20. Take away your costs for running an office, branding, web site, data vendors, phone lines and IT, this should leave you 370k to pay each headcount a salary and bonus if you mange to return the same as my savings account wIth HSBC. Obviously not all your headcount are going to cost you this. If you can accept that bonus should be a reward for increasing your clients wealth not decreasing it, the HF world is still a more favourable environment than working for the evil empire in Fleet St. Be transparent with your investors, invest time in maintaining your relationships and hopefully you can stay in the game until your strategy can return you 15-20 % and enable your watermark fees to aquire you significant wealth. If you want to sit on a beach because your ego can’t cope with not receiving the rewards of 05/06 then go and make way for those that want to play.

  4. Good. Let them eat grass.

  5. Never was a truer word said. HF are about not losing your clients money and making when you can. Too many shops muddled through the past few years using some leverage and a booming market.

  6. apt typo from hedgie in line 3…?

  7. Just as a cautious businessman avoids investing all his capital in one concern, so wisdom would probably admonish us also not to anticipate all our happiness from one quarter alone.

  8. Kloot – read the sarcasm in Formertrader’s comment please. Are the guy/gal who eats whatever company management tells them?

  9. @freud: as well as the very apt typo there are so many others (a second in line 3, then lines 6, 9 and 14) that one starts to suspect hedgie has acquired his position and status more through luck than talent. His second effort is even more groanworthy. Apart from that, thoroughly nice bloke

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