Across the industry, compensation levels are expected to decrease 5%. The uptick in market volatility will likely result in wider differentials in pay due to variation in incentive compensation pools. This would represent a dramatic shift for an industry that had, until recently, experienced strong asset growth and a steady demand for talent.
“Asset managers are facing difficult decisions about budgets,” says Greenwich Associates analyst Kevin Kozlowski. “2016 will be a much tougher slog for managers—especially the biggest firms.”
Pay Falls Short of Expectations
Buy-side compensation for 2014 was flat to just slightly higher than 2013 levels—falling short of market expectations for increases in the range of 5% to 10%.
- U.S. Equity Portfolio Managers: Total average annual compensation was fairly flat from 2013 to 2014, ending at approximately $690,000. Mix of pay was also essentially unchanged over the past 12 months, with an average $460,000 or 65% taking the form of bonus and the remaining 35% as salary.
- U.S. Fixed-Income Portfolio Managers Compensation: Held firm from year-to-year at levels not seen since 2005. Total annual pay averaged $504,000 in 2014, with almost 60% coming from bonus.
- U.S. Buy-Side Fixed-Income Traders: Total annual compensation increased again to approximately $325,000 in 2014 with slightly more than half of 2014 pay from bonus.
- U.S. Buy-Side Equity Traders: Head equity traders saw a steady appreciation in compensation from 2011 to 2014. This aligns well with previous estimates for investment management while equity traders have seen a modest decrease in compensation since 2012.
“Portfolio managers and buy-side traders have been paid well during the good times, with many professionals experiencing several years of steady compensation increases,” says Johnson Associates managing director Francine McKenzie. “As performance lags and asset growth slows, we do not expect firms to alter compensation structures to deliver increases or even maintain current levels.”
Hedge Funds vs. Traditional Managers: The Pendulum Swings
Hedge fund compensation could be better moving forward as return-hungry investors direct assets to alternative products. However, compensation among hedge fund professionals will vary dramatically, with pay skewed toward firms that have produced strong investment returns, and within those firms, to the teams specifically responsible for generating that performance.
In the recent past, hedge funds and traditional asset management firms have been on opposite trajectories, with traditional firms closing the historic gap in pay. Looking ahead, Greenwich Associates and Johnson Associates expect the dynamic between hedge funds and traditional firms to swing in the opposite direction.
An increase in market volatility should create alpha-generating opportunities for hedge funds that will appeal to investors struggling to earn attractive returns and diversify portfolios. These positive factors will provide support for hedge fund compensation. As pay levels at traditional management firms are held back by an increasingly challenging market environment, the compensation gap could begin to widen once again.