Despite an extremely difficult fourth quarter, hedge funds were able to squeeze out a slightly bigger bonus pool for employees in 2018. Cash and long-term equity incentives were up 2% last year compared to 2017, according to a new report from pay consultant Johnson Associates. Only sell-side fixed income traders had a less fruitful bonus season, with incentivized pay dropping as much as 5%. Everyone else – M&A bankers, underwriters, asset managers, private equity professionals and sell-side equities traders, among other front-office roles – saw at least a 5% jump.
Looking forward, hedge fund managers and buy-side traders are expected have an even more difficult year, according to Johnson Associates’ annual “fearless predictions." The firm expects hedge fund layoffs and downsizing to occur in 2019, due to both an increase in automation and business dynamics, plus a recognition of “half-hearted” product and geographical expansions that are proving to be mostly unsuccessful.
Hedge fund compensation for 2019 will also head south, according to the report. Johnson Associates are predicting a 5% drop in total compensation, despite pushing clients to increase base salaries by 4% to 5%. “Low base salaries today often indicate dated thinking,” the authors wrote. “It has an innate appeal as a simple metric.” Hedge funds are starting to partially recognize this and have upwardly adjusted base salaries for younger workers who are likely more prone to obsess over upfront compensation.
However, firms don’t seem to be keeping up with base salaries for senior staff, particularly when it comes to tech employees, resulting in “continued angst” over competition for high-end tech talent. The “reality [is] that base salary levels matter to almost every professional.” Buy-side quants in particular have begun complaining about pay inequity. The danger, of course, is that larger salaries usually coincide with bigger bonus expectations. That won’t be the case in 2019, the report suggests.
The final “fearless” prediction for 2019 is an increase in personal accountability when it comes to compensation. Johnson Associates believes firms will concentrate less on the success of the entire trading desk and more on personal performance come bonus time. Easier said than done.
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