Hedge fund pay may fall 25% in 2009 as fees evaporate

New York: Compensation for US hedge-fund employees may drop as much as 25% this year as the firms try to recoup last year’s investment losses.

The decline will cut hedge-fund paychecks to about half the record levels of 2007, according to estimates by Alan Johnson, founder of Johnson Associates Inc., a New York-based compensation-consulting firm whose clients include financial services companies.

About 70% of the industry’s 6,800 so-called single-manager funds lost money in 2008, with the average fund dropping 19% according to data compiled by Hedge Fund Research Inc. That means most clients don’t have to pay performance fees—generally 20% of profits—until the losses are made up. Many owners of the private partnerships will cover salaries out of their own pockets, or from pools set aside in previous years, to keep their best employees, Johnson said.

Hedge-fund owners are doing it because they don’t have a choice, Johnson said. Otherwise, their investment staff isn’t going to get paid for three years.

To recover the losses from 2008 and resume charging performance fees, managers will have to post gains of 23%. That will take more than two years, based on average industry returns of the past decade.

Fund losses and withdrawals have also reduced management fees, usually 2% of client assets. Industry assets fell 37% to $1.2 trillion (about Rs61 trillion) from their peak in June, according to estimates by analysts at Morgan Stanley. Hedge funds cater to wealthy investors and institutions such as pension funds and endowments. The industry’s top earners last year were James Simons of Renaissance Technologies Corp., who took home $2.5 billion; John Paulson of Paulson and Co., $2 billion; John Arnold of Centaurus Energy Lp, $1.5 billion, and George Soros of Soros Fund Management Llc., $1.1 billion, according to a survey published in the April issue of Institutional Investor’s Alpha magazine.

Average pay at hedge funds was $794,000 in 2008, down from $940,000 a year earlier, Alpha magazine reported in April. Johnson said that figure was low, though he declined to provide his own average.

Chief executive officers earned an average of $2 million last year, while chief investment officers made $1.4 million, according to Alpha’s survey. Senior portfolio managers took home $1.1 million and senior traders were paid $790,000.

Pay for those hedge fund jobs was about twice as much in 2007, according to the magazine, with CEOs earning an average of $3.8 million, chief investment officers pulling down $3.6 million and senior portfolio managers getting $2.2 million. Though salaries are tumbling, most hedge-fund employees don’t have the option of jumping to another firm to increase their paycheck.

Hedge funds may cut 20,000 workers around the globe this year, a record 14% of the industry’s jobs, according to estimates by New York-based Options Group. About 920 hedge funds, or about 12% of the total, closed last year, according to Hedge Fund Research. Some firms will manage to keep paying employees because they put aside money during flush times.