Senior investment professionals at hedge funds are projected to take a hit to their pay of more 10 per cent this year as the industry struggles through one of its worst periods since the financial crisis.
Average pay for senior analysts — generally the top investment-side role below portfolio manager — will fall from $651,500 in 2017 to $589,000 this year, according to CompIQ, a compensation advisory firm.
The hit is to bonuses, which are set to fall from about $467,000 to $384,000, while base pay will rise from $185,000 to $205,000.
Hedge funds, which were already having a lacklustre year, were caught off-guard by market volatility that began in October. The Hedge Fund Research index, which tracks their strategies, was down about 3 per cent last month, its worst monthly decline since September 2011.
Every major hedge fund strategy tracked by HFR — equity, event-driven, macro, and relative value — declined last month. Only a quarter of hedge funds were in positive territory for the month, according to HFR
“Whatever hedge funds say, they’re actually pretty correlated with the markets,” said Adam Zoia, chief executive of CompIQ. “They pretty much go in sync, despite the fact that they’re supposed to be hedged.”
The company, a division of industry search firm Glocap, calculates its pay estimates based on information from clients, a survey of the industry and their own tracking of more than 200 hedge funds.
Hedge funds are now on track for their worst year in seven years. The industry is down 2.6 per cent for the year to the end of October, according to data from eVestment.
As of mid-November, equity long-short funds have dipped 3 per cent, quant market-neutral strategies were down 2 per cent and trend-following funds were down 1.5 per cent, according to Credit Suisse.
In 2011, the average hedge fund return was negative 4.1 per cent. The worst year on record for funds remains 2008, the height of the financial crisis, when they were down 15.8 per cent for the year.
This year, firms including Greenlight Capital, Jabre Capital and Lansdowne have been hit particularly hard and all have funds in negative territory.
Hedge funds have always claimed they are not correlated to the broader markets and are the safest option during a downturn, using this as a defence in recent years as they were slammed for underperforming much cheaper, passive index products.
But with markets growing increasingly volatile, many managers have been caught off-guard.
Equity hedge funds, which fell 4.3 per cent in October, according to HFR, were exposed for having piled into crowded trades, especially in the tech sector.
You constantly have to run faster, be smarter, innovate . . . in order to be able to compete and win as the overall industry consolidates and you fight for a smaller pie
Goldman Sachs, in research published last week, found “near-record concentration in funds’ largest positions exacerbated the headwind from popular stock underperformance”.
The bank’s Hedge Fund VIP basket, which tracks 50 stocks that are most common among the 10 largest holdings of discretionary hedge funds, has lagged behind the S&P 500 by 725 basis points since mid-June. So far this quarter, hedge funds’ top picks are down 1.5 per cent, while the S&P 500 is up 2.4 per cent, the bank said.
The list’s top five stocks are Microsoft, Amazon, Facebook, Google and Alibaba, while Aetna, Visa, NXP Semiconductors, PayPal and Twenty-First Century Fox round out the top 10.
The poor performance has led some hedge fund managers to predict a contraction in the industry, which would be the first since the financial crisis.
Dmitry Balyasny, founder of Balyasny Asset Management, who reportedly closed one of his own funds last month, said “more and more people are fighting with each other” every day in the $3tn hedge fund industry for a smaller piece of the pie.
“The industry is going through this period where it’s a consolidation and I think it’s just going to accelerate where you constantly have to run faster, be smarter, innovate . . . in order to be able to compete and win as the overall industry consolidates and you fight for a smaller pie,” Mr Balyasny recently told a crowd of hedge fund managers at the Greenwich Economic Forum in Connecticut.
Even before the October bloodbath, investors pulled $39.1bn from hedge funds in September, the highest monthly withdrawal in more than five years, according to data provider BarclayHedge.
Afsaneh Beschloss, founder and chief executive of RockCreek Capital, a fund that invests in hedge funds, said she foresees the industry reverting to its origins. This is when firms were smaller and more reliant on money from founders and high net worth individuals, family offices, endowments and foundations rather than institutional investors doling out tens and hundreds of millions of dollars at a time.
“Everything goes in cycles, and for everything you get paid you have to produce value, so we might be moving a little bit closer to the original idea of hedge funds,” she said.