Despite Volatility, Hedge Fund Compensation Jumps
Despite market volatility and the lingering credit crunch, hedge fund managers are still prospering. Many hedge fund investment professionals saw their compensation soar by a staggering 50% in 2007, according to Alpha Magazine’s second annual hedge fund compensation report. Alpha Magazine also finds that some managers profited enormously form the collapse of the subprime mortgage market. The survey of more than 800 people at nearly 600 firms found that Chief Executives of single-manager fund firms earned on average $3.8 million in total compensation last year. The report however does admit that making money has become more difficult as banks have reduced their lending to hedge funds.
Institutional investors, such as pensions, are still pouring cash into hedge funds. These behemoth investors don’t base their investment decisions on short-term market fluctuations. In fact, pension funds are expected to double their allocations to hedge funds to an average of 8% from 4% within three years – despite recent market volatility, according to Reuters, citing a KPMG survey. As a result, executive search firm, A.E. Feldman, notes that hedge funds still need people to manage the $2.5 trillion industry.
Chief Executives at fund of fund firms took home an average $1.8 million in total compensation, while CEOs at multi-strategy funds earned more than $5.3 million, according to Alpha Magazine. “Even in the hard times that began last summer, many hedge fund managers did reasonably well, though the subsequent spike in volatility and market extremes have fueled extremes in compensation as well,” according to Alpha.
Single-manager firms’ CEOs and CIOs also averaged total compensation of $3.8 million and $3.6 million, respectively, according to the survey.
Average take-home pay for junior traders at multi-strategy and single-manager firms topped $200,000 in 2007. Meanwhile, pay for senior traders averaged $819,000 at multi-strategy firms, and exceeded $1.6 million at single-manager hedge funds.
Quant Funds Bounce Back
In the wake of the credit crisis, a slew of quantitative hedge funds tanked. But these funds are bouncing back, and forging ahead with even more radical concepts, according to Seeking Alpha.
Amid lingering market turmoil, quant funds are pressing into new realms of computational finance, applying concepts from molecular physics, mathematical linguistics, artificial intelligence and other scientific disciplines, according to Alpha Magazine. For example, quant funds may use computer simulations to replicate human behavior to try to predict the countless decisions that drive trading activity. Alpha also says quant designers are trying to incorporate other assets classes into their models, not just stocks.
Most quantitative strategies are designed to be market neutral. Hedge Fund Research (HFR) states that equity market-neutral and statistical arbitrage strategies finished 2007 up 5.8% and 9.1% respectively.
