How Much Do Hedge Fund Managers Earn?
Date: 6 May 2016 Share on Twitter Share on Facebook
In the US, the gap between rich and poor is growing increasingly wider – currently the richest one per cent earn 21 per cent of the nation’s total income. Many of the upper income bracket are involved in hedge funds, a trade which has become synonymous with big profit margins and high wages.
The claim that hedge funds are only a playground for the rich people has long been disproved: they now own over $1 trillion in assets as they become more attractive and accessible to a wide field of investors.
The claim that its managers are some of the best paid businessmen and women in the country has caused an influx of recent graduates to opt for hedge funds over investment banking.
The sky’s the limit: big earners
Hedge fund managers are constantly in search of what is known in the trade as an ‘alpha’, an investment with a high yield at minimal risk. It is this sort of funds that put hedge fund managers among the headlines of Wall Street papers.
One of the most famous big winners is Raymond Dalio, owner of Bridgewater Associates, the world’s largest hedge fund firm, who in 2011 earned $3 billion. Two years previously, David Tepper, founder of New Jersey hedge fund Appaloosa Management, brought home $4 billion, his current worth of $11.5 billion making him the 85th richest person on the planet.
These earnings are not anomalies either. In 2014, the top 25 hedge fund managers averaged an annual salary of $467 million and, in 2015, even the 40th biggest earner took home a $40 million paycheck.
Interestingly, in the last couple of years, the very biggest earners have failed to reach the heights of the likes of Dalio and Tepper. The highest taking last year was the $1.3 billion of Citadel’s Ken Griffiths.
It has also become increasingly apparent that, a big sum one year does not guarantee a comparable earning the next. Despite Tepper’s high 2013 earnings of around $3.5 billion, he only registered $400 million the following year.
Back down to earth: what is ‘normal’ for hedge fund managers?
As spectacular as the figures of some of the elite hedge fund managers are, the reality is that the vast majority do not get a sniff of the 10-digit salaries mentioned above. That said, an average start-out salary of $100k remains a very appetizing proposition.
Moreover, hedge funds usually charge 1-2 per cent of the initial investment, regardless of the fund’s performance, meaning that a good salary is almost guaranteed. For funds that exceed expectations, there is often an ‘incentive charge’ of around 20 per cent, meaning managers can benefit greatly from a successful fund.
There are also improving growth opportunities for hedge fund managers in the long term. The average manager who has been in hedge funds for 5-10 years is likely to attain an annual salary around the $1 million mark.
Many hedge funds now put on training programs and mentoring for future employees, and recent graduates often build up to a salary of $800k p/a as a junior manager.
Question marks: are hedge funds really worth the risk?
Private investment funds have existed under the name ‘hedge funds’ since 1949, but it is only now that questions are beginning to be seriously asked over their efficiency and legitimacy. Many investors are now beginning to ask whether the potential of finding an ‘alpha’ justifies the excessive costs of starting a hedge fund.
The taxation policy of hedge funds has also come under scrutiny in recent years. Capital gains are taxed at between 15-20 per cent, way below the top tax rate of 39.6 per cent on regular income. Last year, the US’s top 25 hedge fund managers earned $11.6 billion, whereas the income for the nation’s 158,000 kindergarten teachers combined would total around $8.5 billion.
Increased skepticism and taxation regarding hedge funds could lead to lower demand, but that is still unlikely to prevent some hedge fund managers breaking into the billions in their annual salaries. The search for an ‘alpha’ continues.