A few billionaire investors have added to their fortunes with big takes in 2014, but others in the hedge fund industry aren’t likely to see a fat bonus this year, relatively speaking.
Bill Ackman, head of the best performing large hedge fund firm, is poised to pull in at least $1 billion, according to rough CNBC calculations using his net worth, stake in $19 billion Pershing Square Capital Management and the fund’s stellar 35 percent return net of fees through early December.
Larry Robbins also pulled in about $600 million so far this year, according to a similar estimate. His Glenview Capital Management has surged again, gaining 12 percent in its main fund and 21 percent in a concentrated version through November, according to performance information obtained by CNBC. Glenview managed $9.9 billion as of Sept. 30.
And Dan Loeb, whose main hedge fund is up 7.1 percent through November, appears set to make about $230 million this year. Third Point manages $16.5 billion.
Spokesmen for Ackman, Robbins and Loeb declined to comment.
Other well-known hedge fund managers are likely to make much less than last year.
David Tepper of Appaloosa Management topped Alpha’s hedge fund “Rich List” with a gain of $3.5 billion in 2013 on double-digit investment increases. But his flagship Palomino fund is up just over 2 percent through November, according to Alpha, making it likely he will earn far less.
Other managers whose performances have dropped off from 2013 include John Paulson of Paulson & Co., Leon Cooperman of Omega Advisors, and Rob Citrone of Discovery Capital Management, among others.
“We are having a mediocre year, but our philosophy is if you made money for the clients, you get paid. If you lose money, you don’t. Very simple but fair approach,” Cooperman wrote in an email to CNBC. “Having done this for 46 years, I can tell you it’s a marathon and not a sprint. Or as the Brooklyn Dodgers used to say, ‘Wait ’till next year!’ ”
Omega’s flagship fund is up just 0.8 percent this year through November, according to a report by HSBC’s Alternative Investment Group. The fund has averaged returns of more than 14 percent since inception in 1992.
Steve Cohen no longer manages a traditional hedge fund because of insider trading issues, but he appears likely to be among the biggest pay winners of the year.
As CNBC previously reported, his personal investing shop, Point72 Asset Management, generated a gross profit of about $1.8 billion in 2014 through mid-October. A more recent figure wasn’t available, and a spokesman for Point72, which managed between $9 billion and $10 billion as of October, declined to comment.
Flat to down
Those gains belie a more difficult year for lower-level hedge fund employees.
“It was a definitely a grind to make money this year,” said Michael Goodman, managing partner at recruiting firm Long Ridge Partners.
Goodman said most compensation will be about the same or slightly down from 2013 overall given mediocre industry-wide performance.
The Absolute Return Composite Index, which tracks hedge funds across strategies in North and South America, gained 4.6 percent through November, on pace to be the third-worst year since tracking began in 1998 (the index fell 0.79 percent in 2011 and 6.95 percent in 2008).
The largest gains in pay will come at funds that focus on credit funds who invest in bonds and debt, according to Goodman. He estimated that pay there would increase between 10 percent and 20 percent, depending on the size of the firm and the performance.
The Absolute Return Credit Index is up 5.71 percent in 2014 through November, the second-best performing mainstream strategy outside of managed futures funds.
Managed futures investors — who trade contracts that predict the price of commodities, stocks and other securities and often use pre-set computer models — are up an average of 6.08 percent, according to Absolute Return. Goodman said they could see pay increase by 10 percent or more from 2013.
Pay at hedge funds that focus on stocks will be roughly the same or down from 2013, according to Goodman, while compensation will fall at so-called macro funds, which bet on broad macroeconomic trends using various types of securities. Both strategies have gained between 3 percent and 4 percent in 2014, according to Absolute Return data, and some prominent funds have posted losses for the year.
Hedge fund pay for investment staff usually pairs a base salary of between $150,000 and $300,000 with a wide-ranging bonus. Usually that bonus is discretionary; it’s given by the head of the firm based on their assessment of the person’s contribution to the fund’s profit that year. Large firms that employ multiple teams of traders also use a formula to determine pay, such as 20 percent of profits on their portfolio.
Hedge funds make money in two ways. One is a charge for simply managing the assets, typically between 1.5 percent and 2 percent. The other is a performance fee, usually 20 percent of gains on client assets in the fund. Firms that manage billions of dollars can make substantial money from fees even when performance is poor.
Adam Herz, a partner at recruiting firm Westwood Partners, gave the example of a portfolio manager at a multibillion dollar multi-strategy hedge fund that earned high single-digit returns in 2014, unexceptional performance that fell from double-digits in 2013. He said the person will likely see their overall compensation cut from $4 million last year to $2 million this year when cash bonuses are given out in January.
“This is not a good year to be an average player at a hedge fund,” said Herz. “Firms don’t feel a lot of pressure to pay people who don’t perform. Other shops are hurting, too, so there’s less chance they poach.”
Last year, senior portfolio manager pay hit an average of $1.46 million, according to the 2014 Hedge Fund Compensation Report by Alpha. Junior-level PMs got mean pay of slightly more than $887,000. And non-investment staffers earned a mean of about $575,000. All figures were up from 2012.
Others emphasized the inherent difficulty in estimating industrywide pay.
“It’s difficult to generalize about changes in hedge fund compensation as it can vary dramatically from firm to firm, regardless of strategy or fund size,” said Carlos Mejia, managing partner of executive search firm Options Group. “If a fund does well, a portfolio manager might get paid a seven-figure bonus, but if it does poorly, he or she may receive no bonus or may be out of a job.”
Of course, few are crying over lower hedge fund industry pay. Median household income from 2009 to 2013, was $53,046, according to the U.S. Census Bureau.
But don’t tell that to hedge fund employees.
“I’ve never met anyone in this industry who feels overpaid,” Goodman joked.
Originally published on CNBC. View the original article here.