Hedge Fund Manager Compensation

Hedge fund manager compensation. What is the hedge fund manager salary? Here’s why it is outrageously high.

Hedge Fund Compensation

Mutual funds typically only charge a management fee. However, hedge funds charge both a management fee and a performance incentive fee. The hedge fund analyst salary is thus usually higher.

Management Compensation

The management fee is a fee based on the entire amount of assets being managed, and may go up to 2 percent. This is deducted from each trading day based on an annualized percentage. The management fee creates a potential conflict of interest, as the hedge fund manager may thus be more interested in acquiring more assets than in generating high portfolio returns.

Performance Incentive Compensation

The performance incentive fee helps offset this conflict of interest, as hedge fund managers also charge another fee based on how well investments perform. This annual fee is typically set at 20 percent of profits. Additional safeguards in place to protect investors include the ‘high-water mark’ safeguard and the ‘hurdle rate’ safeguard.

High-Water Mark

With the high-water mark condition, performance gains are calculated from the baseline of a previous high. Thus, hedge fund managers do not charge for merely recovering from previous losses; the hedge fund manager salary only increases with new profits gained.

Hurdle Rate

With this safeguard, performance incentives are only calculated if hedge funds manage to increase in value at a rate higher than a specified percentage benchmark, such as the LIBOR rate. If the fund performs below this hurdle rate, the hedge fund compensation performance incentive will not be charged.

Hedge fund manager compensation has been under close scrutiny recently, as more and more people are concerned about hedge funds’ lack of transparency. There will likely be fuller disclosures of managerial compensations and hedge fund finances in the near future.

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