Hedge fund managers in the UK are delaying hiring decisions because of confusion over how new remuneration rules will impact their ability to pay senior and front office employees.
The guidelines for hedge fund remuneration under the Alternative Investment Fund Managers Directive (AIFMD) published by the European Securities and Markets Authority (ESMA) in February will require hedge funds to defer 40-60% of bonuses over three years and pay no more than half of total compensation in cash.
This seems simple enough, but local regulators (the Financial Services Authority in the UK) have the option of enforcing some or all of the ESMA guidelines, while some smaller hedge funds could escape the rules entirely. This is causing some confusion.
“Hedge funds in the UK are waiting for the FSA’s stance on the AIFMD proposals, which are due to be published in July this year,” said Tim Wright, asset management reward leader at PwC. “Few are willing to expand while there’s so much uncertainty over what they can pay key staff.”
One hedge fund manager for a large, and successful, UK firm tells us that they have an appetite to recruit, but regulation over pay is “making decisions on big hires very difficult”.
The new guidelines apply to a wide range of people within the hedge funds. Senior management, portfolio managers, ‘risk takers’ – or those exerting material influence on the organisation – and those earning as much as executives (namely, star traders) all fall under the scope of the AIFMD rules.
Unlike banks, hedge funds are unlikely to simply increase base salaries for key staff, since their fee structure makes it impractical to work with high fixed costs, said Wright. What’s more, those operating a limited liability partnership – where members divide up annual profits between them – will still fall under the AIFMD guidelines.
Headhunters said that senior hires in the UK and Europe are few and far between currently. Barry Seath, chief executive of hedge fund-focused Mirage Recruitment, said: “We work in Europe, the US and the Far East and while US hedge fund managers continue to hire senior portfolio managers, there has been a dearth of these roles in the UK over the past three months.”
There is still an influx of traders and investment bankers looking to move to the buy-side to avoid the more restrictive EU bonus cap that is attempting to cap bonuses at 100% of base salary, he added. This may not last if European law makers succeed in extending the cap out to hedge funds and private equity managers.
Lower down the ranks recruitment remains buoyant, according to Peter Elliott, owner of hedge fund-focused recruiters Elliott James: “In the £60-150k base salary range, there’s been an astonishing increase in vacancies over the past three months, particularly for asset raising and sales staff.” Part of this is down to pressures on smaller fund managers to increase assets under management in order to survive, he said.